A comprehensive guide to HMRCs VAT Penalty Regime

HMRC
Tax
VAT errors
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Changes to HMRCs VAT Penalty Regime include the introduction of penalties for late submission of returns or repayments, replacement of Default Surcharge with Late Payment Penalties, and the harmonisation of Interest and the introduction of Repayment Interest which will replace Repayment Supplement. Within this article, we explore these areas more in-depth and outline the impact these changes may have on businesses.

An overview of the penalty changes

The penalties cover late submission and late payment, and whilst initially applying to VAT, also apply to Income Tax Self-Assessment (ITSA). In addition there have also been changes to VAT interest to align more closely with the current ITSA and Corporation Tax Self-Assessment interest regimes. The system is designed to be fairer and lenient towards individuals who occasionally make mistakes, while still imposing penalties on those who intentionally evade their responsibilities.

The late payment penalties will be charged at different rates based on when the payment is received, making them more proportionate to the length of time the payment is outstanding.

When	Who	First Impacted Obligation
1 April 2022	VAT customers	Their first VAT return on or after 1 April 2022
6 April 2024	ITSA customers who are required to submit their returns via Making Tax Digital (MTD)	Their first tax year or accounting period starting on or after 6 April 2024
6 April 2025	ITSA customers not mandated to submit their returns via MTD	Their first tax year or accounting period stating on or after 6 April 2025
6 April 2026	ITSA customers (sole traders and landlords) with income over £50,000, mandated to use MTD for Income Tax	Their first tax year or accounting period starting on or after 6 April 2026

Late submission penalties

The points-based system is the same across VAT and ITSA, with points accruing separately for the both of these. HMRC customers will receive a point for each late submission, and once a penalty threshold has been met, a fixed penalty of £200 will be issued, with another £200 for every subsequent late submission. The threshold will vary according to the filing frequency.

Submission frequency	Penalty threshold
Annual	2 points
Quarterly	4 points
Monthly	5 points

Example – Quarterly return

If you file your VAT returns quarterly, with the return for the quarter ended 30 April 2025 being late (1 point), followed by:

the 31 July 2025 return being on time (remain at 1 point),
and the 31 October 2025 and 31 January 2026 both being late (points 2 and 3),
then again a late return for the quarter ended 30 April 2026 (4th point),

then the financial penalty of £200 will first be applied on the fourth late submission for the 30 April 2026 VAT return. Any subsequent late returns after this date would also have a £200 penalty applied (whilst the penalty points remain above 4).

One important point to note here is that, unlike with the old default surcharge regime where penalties were based on the percentage of the liability shown on the VAT return, the penalty is a fixed £200 regardless of the VAT liability and will therefore apply to both nil returns and returns where a repayment is due to the taxpayer.

Can points be removed?

Resetting multiple points

If a taxpayer has reached the penalty threshold, their total points can be reset to zero at any time, provided both of the following conditions are met. The table below outlines the first condition. In addition, all outstanding VAT returns due in the previous 24 months must have been submitted.

Taxpayers must complete a period of compliance, i.e. submitting all returns on or before the due date. The compliance period is based on the return submission frequency, as identified in the table below:

Submission frequency	Period of compliance
Annual	24 months
Quarterly	12 months
Monthly	6 months

Resetting individual points

If you have not met the threshold, then each individual point will automatically expire after 24 months.

Late payment penalties

HMRC’s late payment penalties are built around the idea that the sooner a taxpayer pays, the lower the penalty rate will be. The first penalty will be based on a set percentage of the balance outstanding up to day 30, and the second penalty will be calculated on amounts outstanding from day 31 until this is paid in full.

Agreeing a payment plan with HMRC may result in penalty charges being suspended.

Late payment/repayment interest

Days after Deadline	Customer Action	Penalty Position
	0 to 15	If you pay in full or arrange a payment plan or between days 1 and 15	No late payment penalty charged
First Penalty	16 to 30 inclusive	If you pay in full, arrange a payment plan or part pay on or up to day 30	First penalty calculated at 3% of what was outstanding at day 15.
	31	If you pay in full, arrange a payment plan or part pay on or after day 30	First penalty calculated at 3% of what was outstanding at day 15, plus 3% of what is still outstanding at day 30.
Second Penalty	Day 31 plus	Until you pay in full or arrange a payment plan	A second penalty is calculated at a daily rate equivalent to 10% per annum (APR) on the outstanding balance until it is paid in full or a payment plan is agreed.

Late payment/repayment interest

The following changes were made for VAT periods starting from 1 April 2022:

Interest rule	Previously	Currently
Late Payment Interest (LPI)	Nil% – Previously, LPI was not charged on late payments for VAT returns.	Interest is charged on all late payments of VAT – calculated at a rate of 4% + the BoE base rate.
VAT Repayment Interest (RPI)	5% – Repayment supplement for failing to make repayment within 30 days of the claim. The payment or refund due to the customer is increased by 5% of the amount due to be paid or refunded or £50, whichever is greater.	Repayment Interest replaces the Repayment supplement- RPI will be paid at the BoE base rate less 1% (subject to a minimum 0.5% rate). HMRC will pay RPI on any tax due to be repaid to the customer (from day +1 a repayment return is received until the date a repayment is due).

Closing thoughts

In most cases, these situations arise from honest mistakes or short-term cash-flow pressures, and the new rules reflect that.

However, businesses that are consistently struggling to meet their VAT obligations face a more challenging picture. With late payment penalties now reaching up to 3% at day 15, a further 3% at day 30, and a daily rate of 10% per annum from day 31, the costs can escalate quickly for those paying significantly past their due date. If you are concerned about your ability to meet upcoming VAT deadlines, engaging with HMRC early and exploring a Time to Pay arrangement is strongly advisable – acting before day 15 remains the most effective way to avoid penalties altogether.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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