A New Approach to VAT Late Submissions

More than 300,000 VAT-registered businesses received penalty points from HMRC in the first year of the new points-based system, according to figures released following its introduction in January 2023. The change marked a significant departure from the previous regime, where a single missed VAT return could trigger an immediate financial penalty. Under the current framework, HMRC builds a case over time before issuing a financial charge, giving businesses a structured warning system that rewards consistent compliance.

Understanding how this system works is not simply a matter of avoiding fines. It is about knowing where you stand at any given moment and what steps to take when a point is issued. For small businesses and contractors managing their own VAT, or for accountants overseeing multiple clients, the points-based approach requires a working knowledge of thresholds, timescales, and reset conditions.

How the Points-Based VAT Penalty System Works

When a VAT return is submitted late, HMRC issues one penalty point. Points accumulate across successive periods, and once the threshold for your filing frequency is reached, a financial penalty of 200 pounds is charged. From that point, every further late submission triggers an additional 200 pound penalty until the account is cleared.

The threshold varies by how often you file. Businesses submitting annual VAT returns reach the penalty threshold after two points. Those on quarterly returns reach it at four points, and monthly filers at five. HMRC outlines the full threshold structure on the Self Assessment penalties page, which also covers late payment interest charges that apply separately from the points system.

Points are not permanent. A point expires after 24 months if no further late submissions occur during that period. However, once the financial penalty threshold has been reached, expiry does not apply in the same way. To clear the account at that stage, a business must file all outstanding returns on time for a set period and have no outstanding returns over 24 months old.

Late Payment Penalties on VAT

Separate from the points system, HMRC also applies late payment penalties when VAT is paid after the due date. These are distinct from the filing penalties and apply as a percentage of the unpaid VAT. A payment made between one and 15 days late incurs no penalty if the business contacts HMRC within that window and agrees a payment plan. After 16 days, a two percent charge applies to the amount still outstanding, rising to four percent after 31 days.

HMRC also charges interest on late payments at the Bank of England base rate plus 2.5 percent. This accrues daily from the date the payment was due until the date it is received. Interest and late payment penalties run concurrently, meaning a delayed payment of significant size can attract a substantial combined charge over a relatively short period.

What Triggers a VAT Penalty Point

A penalty point is issued each time a VAT return is submitted after the deadline for that period. The deadline for most quarterly returns is one calendar month and seven days after the end of the VAT period. For example, a VAT period ending 31 March has a filing and payment deadline of 7 May. Missing this deadline by a single day counts as a late submission and generates a point.

The rules apply equally to nil returns. If a business has no VAT to report for a period but fails to submit the return on time, a penalty point is still issued. Many businesses make the mistake of assuming that a zero-balance return is lower priority than one with tax to pay. HMRC treats all late returns the same under the points system regardless of the amount involved.

How to Avoid Accumulating Penalty Points

The most effective protection against penalty points is a reliable VAT filing calendar. Each VAT period end date and the corresponding submission deadline should be logged well in advance, with reminders set no later than two weeks before the deadline to allow time for reconciliation and review before submission.

If your VAT records are consistently accurate and reconciled, preparing each return becomes a straightforward process. Businesses that struggle with this often benefit from outsourced bookkeeping that takes the administrative burden off the business owner and ensures deadlines are met without relying on memory or manual tracking.

Where a genuine difficulty arises and a deadline cannot be met, contacting HMRC before the due date is always preferable to missing it without communication. HMRC has the discretion to consider reasonable excuse claims, though these are assessed case by case and are not guaranteed.

VAT Penalties and Making Tax Digital

The points-based penalty system operates within the broader Making Tax Digital framework. All VAT-registered businesses are now required to keep digital records and submit returns using MTD-compatible software. HMRC provides full guidance on the MTD requirements and how they interact with the penalty regime on the Making Tax Digital for VAT guidance page.

Using MTD-compliant software has a practical benefit beyond compliance. Most platforms send automated reminders ahead of filing deadlines and maintain a clear audit trail of submissions. This makes it straightforward to confirm whether a return has been filed and received by HMRC, removing any ambiguity about whether a deadline has been met.

For businesses that are newly VAT-registered or transitioning to MTD, getting the bookkeeping foundations right from the outset prevents the kind of administrative gaps that lead to missed deadlines. Our guide to bookkeeping services for small businesses covers how professional support can simplify this process.

About the Author

Stuart Kerr is Managing Director of Bookkeeping Packages Ltd, an outsourced bookkeeping service supporting UK small businesses and accountancy practices. With over 20 years of bookkeeping experience, Stuart specialises in helping businesses maintain accurate records and management accounts. Stuart is a bookkeeper, not a regulated financial adviser. Nothing in this article constitutes tax or financial advice. Call 0161 531 0087 or visit bookkeepingpackages.co.uk.

The information in this article is provided for general guidance only. Stuart Kerr is a professional bookkeeper, not a regulated financial adviser. This content does not constitute tax or financial advice. For advice specific to your circumstances, please consult a qualified accountant or tax adviser.

By Stuart Kerr, Managing Director, Bookkeeping Packages Ltd