Understanding the changes to the VAT penalty regime

A shift from surcharges to penalty points

For many years, late VAT returns or payments could lead to a surcharge regime that often felt disproportionate. Businesses missing a deadline risked facing escalating penalties, regardless of whether it was a genuine slip or a repeat problem.

That system has now been replaced with the changes aiming to simplify VAT penalties and interest. The key changes separate charges into the following:

• Late submission penalties
• Late payment penalties
• Late payment interest

Late submission penalties

Following the change, late VAT return submission penalties follow aa points-based approach. Instead of an automatic surcharge, businesses accumulate penalty points for late submissions- this includes the submission of nil VAT returns or VAt returns resulting in a repayment from HMRC. Once a threshold is reached, a financial penalty applies. This shift is designed to be more balanced, distinguishing between occasional mistakes and persistent non-compliance.

Generally, each VAT return that is filed late now results in a penalty point (with some exceptions). If a business reaches the threshold number of points, a £200 penalty is imposed by HMRC, and for each subsequent late submission, fan additional £200 penalty is charged. The threshold depends on how frequently VAT returns are submitted:

• Annual returns: 2 points
• Quarterly returns: 4 points
• Monthly returns: 5 points

Points are not indefinite. They can expire after two years if a business stays compliant, or can be reset sooner once all outstanding returns are filed and a period of compliance has been maintained.

Late payment penalties

Late payment penalties can apply to any VAT return where payment has not been made in full by the prescribed due date. Late payment penalties are charged from the first day the payment is overdue, until when this has been fully paid off. It is important to note, any VAT payment due dates refer to the date the funds are received by HRMC and not when payment is actioned, as there are instances where banks can take several days to process payments.

Late VAT payment penalties are not imposed only on any payments due in respect of a submitted VAT return, but also:

• VAT due following an amendment to a VAT return
• A VAT assessment issued by HMRC

VAT late payment penalties are based on a staged penalty model . The longer the full payment is outstanding the higher the penalty .

This approach aims to encourage timely payment with specified ‘grace’ periods giving businesses a short buffer to resolve cash flow issues or administrative delays.

Late payment interest

In addition to VAT late payment penalties, late payment interest is charged if any VAT-related amounts are paid late on any outstanding amounts until the overdue payment is paid in full. Like VAT late payment penalties, late payment interest is charged from the first day that the payment becomes overdue until it has been paid in full. Late payment interest is calculated at the Bank of England base rate plus 4%.

Appeals and payment plans

The approach to appeals has changed too, especially regarding late payment penalties and interest. Typically, it is expected that if a late payment penalty has been imposed, it is likely late payment interest has been charged also. HMRC require separate appeals to be made in respect of each charge rather than appealing the two together.

Businesses can request HMRC for a payment plan which is referred to as a Time to Pay Arrangement. These need to be agreed with HMRC, and can be used as n approach to minimising further penalties and interest. However, before requesting such arrangements, a review of the business’ other tax obligations should be reviewed also as HMRC are strict with payment plan arrangements and in some cases, may be resistant to new payment plans depending on what the business has by way of:

• Existing payment plans
• Payment plans history
• Outstanding debts for taxes other than VAT

What this means for businesses

For most businesses, the changes should feel fairer and simpler, particularly if businesses usually submit VAT returns and make payment on time and only occasionally miss a deadline. The new regime recognises the difference between an isolated oversight and consistent non-compliance.

However, it also places more emphasis on record-keeping and timeliness. Even one late VAT return or payment will now carry consequences , and multiple delays can add up quickly. Businesses will need to be confident that their systems and processes are strong enough to avoid accumulating points unnecessarily.