Most directors carry an out-of-date map of what a late VAT return costs. The default surcharge that ran for years, a single percentage bolted onto the VAT you owed, was scrapped for VAT periods starting on or after 1 January 2023. If your instinct about the penalty comes from the old regime, it is now wrong, and usually wrong in HMRC’s favour.
The system that replaced it splits one problem into two. Filing your return late is penalised separately from paying your VAT late, on entirely different clocks. You can be fully paid up and still collect a filing penalty, or file on the exact day it is due and still watch a payment penalty build.
From the office-holder’s chair, that split matters because the two clocks compound. We act for directors whose VAT arrears have already crossed from a filing nuisance into a solvency question, and the point where that happens arrives earlier than most people expect.
How the VAT Penalty Regime Changed in January 2023
The old default surcharge applied a rising percentage to any late return or payment, escalating with each further default inside a rolling surcharge period. One system, one charge, triggered by lateness of either kind.
Since 1 January 2023, that single charge has been replaced by three separate mechanics that run at the same time: a points-based penalty for late submission, a tiered penalty for late payment, and interest calculated independently of both. The framework sits under the Finance Act 2021 and applies to VAT periods beginning on or after that date.
The new regime is not softer. It is more forgiving of a one-off slip and markedly less forgiving of a habit. Knowing your VAT filing and payment deadlines is now the difference between a clean record and a points balance that turns into cash penalties.
Penalties for Filing a Late VAT Return (Points System)
Every VAT return you submit after the deadline earns one penalty point. Nothing is charged for the first points. Once you reach the threshold for your filing frequency, HMRC charges a flat £200 penalty, and a further £200 for each subsequent late submission while you remain at the threshold.
The threshold depends on how often you file:
- Quarterly filers: 4 points, the standard position for most businesses.
- Monthly filers: 5 points.
- Annual filers: 2 points.
Points do not sit on your record forever. They clear after a period of sustained compliance, which for a quarterly filer means submitting four consecutive returns on time. Miss one before the slate is clean and the count keeps building toward the next £200.
Penalties for Paying VAT Late After You File
File on time but pay late and you face a different penalty entirely, one that escalates the longer the debt sits unpaid. The tiers work like this:
| How late the payment is | What HMRC charges |
|---|---|
| Up to 15 days overdue | No penalty, but interest runs from the first day the payment is late. |
| 16 to 30 days overdue | A penalty of 3% of the VAT still owed at day 15. |
| 31 days or more overdue | A further 3% of the VAT owed at day 30, taking the first penalty to 6%. A second penalty then accrues daily at an annualised 10% on the balance outstanding. |
The dates to circle are day 15 and day 30. This is the tier that catches directors who assumed a lapsed direct debit or a short cash gap was a private matter between them and their bank.
It is not. By day 31 two separate penalties have landed and a third is compounding. In the cases we handle, this is where a manageable VAT bill quietly turns into an unmanageable one. If you cannot pay your VAT in full, the response you make in the first fortnight decides how much this costs.
How Late Payment Interest on VAT Is Calculated
Interest sits on top of the penalties, not inside them. HMRC charges late payment interest at the Bank of England base rate plus 4%, accruing daily from the due date until the bill is paid in full.
The rate is not fixed. HMRC updates its published rate shortly after a change in the Bank of England base rate, so a rate rise reaches your VAT debt within a few weeks. Interest is also not a penalty you can argue away on reasonable-excuse grounds. It is simply the price of time, and it runs whether or not you are disputing anything else.
What Happens If You File No VAT Return at All
Filing nothing does not buy you quiet. If you fail to submit a return, HMRC issues a VAT notice of assessment of tax, an estimated bill built from your trading history. The power to raise it comes from the Value Added Tax Act 1994.
That estimate is usually pitched high, on purpose, to make filing the correct return the cheaper option for you. In our casework the assessment is a prod, not a settlement. It does not pause anything: you still collect late-submission points and late-payment penalties on the amount HMRC has estimated, so ignoring the return leaves you paying penalties on a figure you did not even set.
Penalties for Inaccurate VAT Returns
A return filed on time can still cost you if the figures are wrong. Where a VAT return contains a careless or deliberate inaccuracy, HMRC can charge a separate penalty of up to 100% of the tax underpaid, scaled by how the error arose and how you disclose it.
These inaccuracy penalties run under Schedule 24 of the Finance Act 2007 and sit entirely apart from the late-filing and late-payment tiers. The practical lesson is blunt: if you spot your own error, correcting it before HMRC finds it is almost always the cheaper route, because unprompted disclosure pulls the penalty down.
When we review a director’s VAT history, an unforced correction is one of the first things we look for.
Acting Before Late Payment Penalties Compound
The arithmetic in this new regime rewards early movement more sharply than the old one ever did. A Time to Pay arrangement agreed with HMRC before day 15 stops the late-payment penalty starting at all.
Agreed between day 15 and day 30, it holds your penalty at 3% rather than letting it double to 6%. After day 30, both 3% charges have already landed and the daily 10% penalty is already running against you.
That is why the honest advice is to open the conversation before a penalty notice arrives, not after. Waiting for the letter is the single most expensive habit we see in VAT cases, because by then the compounding has started and the room to negotiate has shrunk.
AABRS® acts as licensed insolvency practitioners. Where your VAT arrears are no longer a one-off, our team can open the HMRC Debt Management conversation, negotiate a Time to Pay arrangement, and model honestly whether the business can absorb the debt or needs a formal rescue process. Call us on 0208 444 3400 or use our contact form to talk it through before the next deadline passes.
Frequently Asked Questions About Late VAT Returns or Payments
What is the penalty for submitting a VAT return late?
Each late return earns one penalty point. You are charged a flat £200 once you reach the threshold for your filing frequency: 4 points for quarterly filers, 5 for monthly, and 2 for annual. Every further late submission while you sit at the threshold adds another £200, until a run of on-time returns clears the points.
What is the penalty for paying VAT late?
There is no penalty in the first 15 days, though interest runs from day one. Between 16 and 30 days you are charged 3% of the VAT still owed at day 15. From 31 days a further 3% of the amount owed at day 30 applies, taking the initial penalty to 6%, and a second penalty then accrues daily at an annualised 10% on the outstanding balance.
Does interest apply on top of VAT penalties?
Yes. Interest is charged separately from the penalties, at the Bank of England base rate plus 4%, and it accrues daily from the due date until the bill is cleared. HMRC updates its published rate shortly after a change in the base rate, so a rate rise feeds through to your debt within weeks.
What happens if I do not file a VAT return at all?
HMRC issues a VAT notice of assessment of tax, an estimated bill based on your trading history and usually set higher than the real figure to prompt you to file. It does not stop the penalty clock. You still incur late-submission points and late-payment penalties on the estimated amount, so filing the correct return is almost always cheaper than leaving the assessment to stand.
Can a Time to Pay arrangement stop the late payment penalty?
Timing is everything. A Time to Pay arrangement agreed before day 15 prevents the late-payment penalty starting at all. Agreed between day 15 and day 30, it holds the penalty at 3% rather than 6%. After day 30 both 3% charges have already applied, so the earlier you approach HMRC, the less the arrears cost you.