VAT penalties can arise when a business submits a VAT Return late, pays VAT after the deadline or provides inaccurate information. Since January 2023, late submissions have been handled through a points-based system, while late payments are subject to separate percentage penalties and interest.
The points system means that one late VAT Return does not usually create an immediate financial charge. HMRC instead awards a penalty point, with a £200 penalty becoming due when the business reaches the threshold for its filing frequency.
Once the threshold has been reached, every further late submission can create another £200 charge until the business completes the required period of compliance and submits all outstanding returns.
How VAT penalties are divided
The VAT penalty regime separates late submission from late payment. A business can therefore receive a penalty point for filing its return late even where no VAT is due.
Conversely, a business can submit the return on time but face interest and late-payment penalties because the VAT was not paid by the deadline.
The principal consequences are:
Penalty points and £200 financial penalties for late VAT Returns, percentage-based penalties for VAT paid late and late-payment interest charged from the first day the tax is overdue.
HMRC’s guidance on late VAT Returns and payments explains the separate treatment of submission and payment failures.
How the VAT penalty points system works
A business normally receives one penalty point whenever it submits a VAT Return after the deadline. HMRC notifies the business when the point is awarded.
Points accumulate until the business reaches the threshold applying to its VAT accounting periods. When the threshold is reached, HMRC charges a £200 penalty.
The late return that creates the final threshold point also creates the first £200 financial penalty. The business does not need to miss another return after reaching the threshold before the charge applies.
While the business remains at the threshold, each additional VAT Return submitted late creates a further £200 penalty. The points total does not continue increasing beyond the threshold.
VAT penalty point thresholds
The threshold depends on how frequently the business is required to submit VAT Returns.
A business filing annually reaches the threshold at two points. A quarterly filer reaches it at four points, while a monthly filer reaches it at five points.
Most VAT-registered small businesses submit quarterly returns, so they can generally receive three points without an immediate financial charge. The fourth late submission creates the £200 penalty.
HMRC’s official VAT penalty point guidance confirms the following thresholds:
Annual submissions: 2 points. Quarterly submissions: 4 points. Monthly submissions: 5 points.
An example for quarterly VAT Returns
Consider a company that submits VAT Returns quarterly and already has three penalty points from earlier late returns.
If its next return is late, HMRC awards the fourth point and charges a £200 penalty because the quarterly threshold has been reached.
If the following return is submitted on time, the business receives no further penalty, but its points remain at the threshold.
If the next return after that is late, HMRC charges another £200 because the business is still at the threshold when the submission failure occurs.
This continues until the business meets the conditions for removing its points.
Nil and repayment VAT Returns can still create points
The points system applies even where the VAT Return shows nothing payable. A nil return submitted after the deadline can still generate a penalty point.
A repayment return can also create a point where it is filed late. The fact that HMRC owes money to the business does not remove the submission obligation.
This means every VAT Return should be treated as a compliance deadline, regardless of whether the expected result is a payment, repayment or nil balance.
A business should not postpone a nil return merely because no money is due. Once enough late submissions accumulate, the same £200 penalties apply.
When VAT penalty points expire automatically
Where the business has not yet reached its penalty threshold, individual points can expire automatically after the relevant period.
In broad terms, a point expires around 24 months after the month containing the missed deadline, provided the business has not reached the threshold in the meantime.
The precise expiry date depends on whether the original deadline fell on the final day of a month. HMRC calculates and displays the expiry date within the business’s VAT account.
A further late return during this period does not necessarily restart the expiry period for every earlier point, but it creates another point that has its own expiry date.
Businesses should check their online VAT account rather than relying on a manual estimate of when points will disappear.
How to remove VAT penalty points after reaching the threshold
Once the business has reached its threshold, the points do not simply expire one by one. The business must satisfy two separate conditions before HMRC resets the total to zero.
First, every VAT Return due during a defined compliance period must be submitted on time. The required period depends on the filing frequency.
Annual filers generally need 24 months of compliance, quarterly filers need 12 months and monthly filers need six months.
Second, the business must submit all VAT Returns due during the previous 24 months. An older outstanding return can prevent the points total from being cleared even where recent returns have been filed on time.
HMRC’s guidance on removing VAT penalty points explains the compliance periods and outstanding-return condition.
Changing VAT filing frequency
A business may move between annual, quarterly and monthly VAT periods. HMRC adjusts the threshold and existing points when the filing frequency changes.
For example, moving from quarterly to monthly filing raises the threshold from four to five points and normally adds one point to the existing total.
Moving from monthly to quarterly filing reduces the threshold and normally removes one point. The adjustment cannot reduce the balance below zero.
A business with no existing points remains on zero when its filing frequency changes.
The business should check the revised position in its VAT account after any change rather than assuming the original threshold continues to apply.
VAT late-payment penalties are separate
Late-payment penalties apply according to how long VAT remains unpaid. They are separate from submission points and financial penalties.
A business that submits its return late and pays late can therefore face both types of charge, together with late-payment interest.
The late-payment regime is intended to increase the charge as the delay becomes longer. Paying or arranging payment promptly can reduce or prevent part of the percentage penalty.
The rules apply not only to VAT shown on a return but also to certain assessments, corrections and amended liabilities.
Payments made within 15 days
There is normally no first late-payment penalty where the business pays the VAT in full within 15 days of the due date.
The same protection may apply where the business agrees a Time to Pay arrangement with HMRC within that period and follows the arrangement.
Late-payment interest still runs from the day after the original deadline until the amount is paid. Paying within 15 days therefore avoids the percentage penalty but not the interest charge.
A business that cannot pay should contact HMRC promptly rather than waiting until the 15-day period has expired.
The first VAT late-payment penalty
Where VAT remains unpaid after 15 days, the first late-payment penalty begins to apply.
If the amount is paid or a Time to Pay arrangement is agreed between day 16 and day 30, the first penalty is generally calculated at 2 per cent of the VAT outstanding on day 15.
If the tax remains unpaid at day 30, the first penalty normally consists of 2 per cent of the VAT outstanding on day 15 plus another 2 per cent of the amount still unpaid on day 30.
This means the first late-payment penalty can reach 4 per cent where the full amount remains unpaid for at least 30 days.
The second VAT late-payment penalty
A second late-payment penalty begins after day 30 where VAT remains outstanding.
This charge accrues daily at an annual rate of 4 per cent on the unpaid balance from day 31 until payment is made or a Time to Pay arrangement begins.
The longer the amount remains unpaid, the larger this second component becomes.
Paying part of the liability reduces the balance on which later daily penalties are calculated. The business should therefore pay as much as it reasonably can even where full settlement is not immediately possible.
Late-payment interest on VAT
HMRC charges late-payment interest from the day after the VAT payment deadline until the tax is paid in full.
Interest runs even during the first 15 days when no percentage late-payment penalty may be due.
The interest rate is linked to the Bank of England base rate and can change. Businesses should therefore check HMRC’s current published rate rather than relying on an older percentage.
HMRC’s interest-rate guidance provides the current late-payment and repayment rates.
Interest is calculated separately from the percentage penalties and can continue accumulating while an outstanding VAT dispute or bookkeeping problem remains unresolved.
Time to Pay arrangements
A business unable to pay its VAT liability may be able to agree a Time to Pay arrangement with HMRC.
The arrangement normally spreads the debt over an agreed period. HMRC may ask about the business’s income, expenses, assets, liabilities and ability to make regular payments.
Agreeing an arrangement promptly can stop further late-payment penalties from building from the agreement date, provided the business keeps to the terms.
Late-payment interest normally continues until the tax is paid in full.
Missing an instalment can cause the arrangement to fail and may allow penalties to resume. The business should contact HMRC immediately if it cannot maintain an agreed schedule.
Typical VAT filing deadlines
For most quarterly VAT Returns, the filing and electronic-payment deadline is one calendar month and seven days after the end of the VAT period.
A VAT quarter ending on 31 March would therefore normally have a submission and payment deadline of 7 May.
A return ending on 30 June would normally be due by 7 August.
Businesses using annual accounting, payments on account or another arrangement may have different payment requirements, so the dates shown in the VAT account should be checked.
Where the deadline falls on a weekend or bank holiday, payment should reach HMRC by the deadline shown. The business should allow enough banking time rather than initiating payment at the last moment.
What happens when no VAT Return is submitted?
If HMRC does not receive a return, it may issue an estimated assessment of the VAT it believes is due.
The assessment does not replace the missing return. The business must still submit the actual VAT Return.
If the assessment is higher than the true liability, the business should not assume that paying nothing will cause it to disappear. Filing the return allows HMRC to replace the estimate with the actual figures.
If the assessment is lower than the real liability, the business remains responsible for reporting and paying the correct amount.
Interest and penalties may continue to apply while the return or payment remains outstanding.
Appealing a VAT penalty point or financial penalty
A business can appeal a VAT penalty point or financial penalty where it believes HMRC’s decision is wrong or it had a reasonable excuse.
The appeal normally needs to be made within 30 days of the decision or notice. The business should explain what prevented compliance and provide evidence where available.
Potential reasonable excuses can include serious illness, bereavement, fire, flood, theft or a substantial failure of HMRC or software systems.
The business must normally correct the failure as soon as reasonably possible after the excuse ends. A temporary problem does not justify an unlimited delay.
Pressure of work, forgetting the deadline or relying on an employee without suitable oversight will not necessarily amount to a reasonable excuse.
Software problems and VAT appeals
A genuine software failure may support an appeal where the business had taken reasonable steps to submit on time.
Useful evidence can include screenshots, error messages, support tickets, emails with the software provider and records showing when submission was attempted.
Discovering on the deadline that the software had never been authorised with HMRC may be less persuasive where the business had several weeks to complete the setup.
Making Tax Digital software should be checked before each deadline, particularly after password changes, agent changes or updates to HMRC authorisation.
The business should retain the HMRC submission receipt rather than assuming that clicking submit proves the return was accepted.
VAT penalties and Making Tax Digital
VAT-registered businesses must generally keep specified VAT records digitally and submit their returns using Making Tax Digital-compatible software unless HMRC has granted an exemption.
The points-based penalties still apply where a return is late because the business failed to maintain digital records or complete its software setup in time.
Our guide to Making Tax Digital explains the digital-record and compatible-software requirements applying to VAT Returns.
Software reminders can help, but they do not replace a documented compliance calendar and a person responsible for completing and reviewing the return.
VAT adjustments and correction records
A business may discover that a previous VAT Return contained an error. The appropriate correction method depends on the amount, nature and circumstances of the error.
Some errors can be corrected through a later VAT Return, while others must be disclosed separately to HMRC.
The correction should be supported by calculations and records explaining the original treatment and revised figure.
Our guide to VAT adjustments in Xero explains how corrections should remain visible and supported rather than being hidden through an unexplained journal.
Correcting an inaccurate return does not necessarily remove a late-submission or late-payment penalty relating to the original deadline.
Bank reconciliation before a VAT Return
Bank reconciliation can reveal missing purchases, omitted sales, duplicated supplier payments and net card settlements before they affect the VAT Return.
Every relevant bank account, credit card and payment platform should be reconciled before the final return is reviewed.
Our guide to bank reconciliation explains how accounting records can be compared with financial statements to identify incomplete and duplicated transactions.
Reconciliation does not prove that the VAT code is correct. The business still needs suitable invoices and an understanding of whether the supply is standard-rated, reduced-rated, zero-rated, exempt or outside the scope.
VAT registration and first returns
Newly VAT-registered businesses should establish the first return period and deadline as soon as the VAT registration number is issued.
The first return may cover an unusual period and can include eligible pre-registration VAT on qualifying goods and services.
Waiting for a paper reminder can result in the deadline being missed. The business should activate its VAT online account and compatible software promptly.
Our guide to how to register for VAT explains the registration threshold, effective date and records needed when a business becomes liable or registers voluntarily.
Common causes of VAT penalty points
Penalty points often arise because the bookkeeping was not completed until the filing deadline. Missing invoices, unreconciled accounts and unanswered transaction queries can then delay the return.
Other common causes include expired HMRC authorisation, staff changes, confusion over the VAT quarter and assuming that a nil return does not need to be filed.
Businesses may also submit through software but fail to confirm that HMRC accepted the return.
A reliable process should specify who prepares the return, who reviews it, who authorises submission and how the receipt is retained.
How to prevent repeated VAT penalties
The VAT period end and submission deadline should be recorded in a compliance calendar with reminders issued well before the due date.
Bookkeeping should be maintained throughout the quarter rather than started after the period has ended. Bank accounts and payment platforms should be reconciled regularly.
Supplier invoices should be collected promptly, and queries should be raised while the transaction remains familiar.
The VAT Return should be reviewed before submission, with enough time left to resolve unusual balances and confirm the software connection.
Our guide to good bookkeeping habits explains how regular record collection and reconciliation reduce deadline pressure.
Checking your VAT penalty position
Businesses can normally see penalty points, financial penalties and relevant notices through their VAT online account.
The account should be checked after a late return, filing-frequency change or successful appeal to confirm the current points balance.
Penalty notices should not be ignored simply because the business believes a return was submitted. The submission receipt, software history and HMRC account should be compared.
Where a return was transmitted but rejected, the business may still be treated as having failed to submit by the deadline unless the issue is corrected or an appeal succeeds.
When outsourced VAT bookkeeping helps
A business with straightforward transactions may be able to maintain and submit its own VAT Returns successfully. External support becomes more useful where transaction volumes, multiple VAT rates, reverse charges or payment platforms create greater complexity.
The service scope should identify responsibility for bookkeeping, reconciliation, VAT review, submission and communication with HMRC.
Bookkeeping Packages Ltd provides a VAT returns service where preparation and submission form part of the agreed bookkeeping arrangement.
Our wider bookkeeping services for UK businesses can maintain the sales, purchase and reconciliation records supporting each return.
Where responsibility for the complete monthly bookkeeping workflow needs to be transferred, our outsourced bookkeeping service explains how ongoing support can be structured.
To discuss late VAT Returns, incomplete records or an ongoing compliance process, use the Bookkeeping Packages enquiry form.
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 reliable financial records and useful management information.
This article is provided for general information only. Stuart Kerr is a professional bookkeeper, not a tax, legal or regulated financial adviser. Nothing in this article constitutes tax, legal or financial advice or representation in an HMRC appeal. Advice specific to your circumstances should be obtained from an appropriately qualified professional.