VAT penalty points - how the late submission and late payment penalties work

Since 1 January 2023, the VAT default surcharge has been replaced by a new two-part penalty regime: one for submitting VAT returns late, and one for paying the VAT bill late. Here is how both work, based on HMRC's published guidance.

Late submission: the penalty points system

Each VAT return you submit after the deadline earns one penalty point. Points build up until you reach the threshold for your filing frequency, which depends on how often you file: annual filers have a threshold of 2 points, quarterly filers 4 points, and monthly filers 5 points.

When you reach the threshold, HMRC charges a £200 penalty, plus a further £200 for each subsequent late return while you remain at the threshold. So a quarterly filer who keeps filing late pays £200 every time after the fourth late return. Note that nil returns count too: sending a nil return late still earns a point. The rules do not apply to your very first VAT return when you register, your final return after deregistration, or one-off returns covering a non-standard period. If HMRC notifies you of a point or penalty, you can check and appeal it through your VAT online account, and penalties can be cancelled where you have a reasonable excuse.

Late payment: the sooner you pay, the lower the penalty

Late payment penalties depend on how far overdue the payment is, measured from the due date. If you pay within 15 days of the due date, there is no late payment penalty at all. Between 16 and 30 days overdue, the first late payment penalty is 3% of the VAT owed at day 15.

From day 31, the penalties step up. The first late payment penalty becomes 3% of the amount outstanding at day 15 plus a further 3% of the amount outstanding at day 30. On top of that, a second late payment penalty starts accruing daily from day 31 at an annual rate of 10% of the outstanding balance, until you pay in full or the two-year assessment time limit is reached. Late payment interest also runs from the first day the payment is overdue until it is paid in full, so even short delays cost something.

If you are struggling to pay, contact HMRC as soon as possible. A Time to Pay arrangement can mean lower or no late payment penalties, and the sooner you arrange it, the better the outcome.

What this means in practice

File on time even if you cannot pay: the submission and payment penalties are separate, and a late return always costs a point even when the return shows nothing due. Pay within 15 days to avoid late payment penalties entirely, and never let a payment drift past 30 days, because the penalties become much steeper from day 31. Diary management is the cheapest tax planning there is.