The new VAT penalty regime is more forgiving than the old one for occasional slip-ups, and meaner for habitual late filers. If you've never been late, you've barely noticed it. If you have, you might already owe HMRC a few hundred pounds you didn't know about.
What changed in January 2023
For VAT periods starting on or after 1 January 2023, HMRC replaced the old "default surcharge" regime with two separate, simpler systems:
- A points-based system for late submission of returns
- A percentage-based system for late payment of VAT due
The two systems are independent. You can submit on time but pay late (or vice versa) and only get one type of penalty. Under the old surcharge system, both errors fed into the same escalating penalty.
Late submission: the points system
Every time you submit a VAT return late, you get 1 penalty point. Points accumulate. When you reach a threshold, HMRC charges a £200 penalty. After that, every further late return is another £200 fine until you reset.
| Filing frequency | Points threshold | Time to reset to zero |
|---|---|---|
| Annual | 2 points | 24 months |
| Quarterly (most common) | 4 points | 12 months |
| Monthly | 5 points | 6 months |
A point lapses 24 months after it was added if you haven't yet hit the threshold. So if you're on quarterly returns and you're late once in 2024, that point disappears in 2026 unless you've been late again.
Once you've hit the threshold and been fined, the lapsing rules don't help — you stay at the threshold and every late return is another £200 until you complete the reset (see below).
Late payment: the percentage system
For payment of VAT due, the penalty depends on how late you are:
| Days late | Penalty |
|---|---|
| 0–15 days late | None (provided you contact HMRC and arrange a Time to Pay agreement within 15 days) |
| 16–30 days late | 2% of the unpaid VAT |
| 31+ days late | 2% of what was unpaid at day 15 + 2% of what was unpaid at day 30 (so effectively 4% if not paid by day 30) |
| From day 31 onwards | An additional 4% per annum daily charge on the outstanding balance, calculated daily |
Stage one (16–30 days, 2% penalty) was reduced to a "soft start" of 0% during 2023, then 2% during 2024 onwards — so for 2026 the 2% is fully applied.
Time to Pay agreements pause the late payment clock. If you can't pay, ring HMRC before day 15 and arrange a payment plan. No first-stage penalty.
Worked examples
Example A: Quarterly business, occasional slip-up
You're on quarterly returns. You submit Q4 2024 return 5 days late. 1 point. Your next 8 returns are all on time. The point lapses in late 2026. No penalty paid.
Example B: Quarterly business, persistent lateness
You're on quarterly returns. You're late in Q1, Q3, Q4 of one year, then late in Q1 the next year. That's 4 points → £200 penalty. You're then late in Q2 → another £200. Q3 → another £200. By Q3 you've paid £600 in submission penalties alone, ignoring late payment.
Example C: Late payment
VAT period ends 31 March, deadline 7 May. You owe £10,000. You don't pay until 14 June (38 days late).
- Day 16: 2% of £10,000 = £200 penalty
- Day 30: another 2% = £200 penalty (total £400)
- Days 31–38 (8 days): 4% per annum on £10k = £8.77 penalty
- Plus interest from day 1 at HMRC's late payment rate (currently around 7.75% per annum)
Total cost: roughly £570 on a £10,000 late payment by 5–6 weeks.
Interest on unpaid VAT
Interest is separate from the penalty system. HMRC charges late payment interest on overdue VAT from the original due date until you pay. The rate is set in legislation and updates with the Bank of England base rate. As of 2026 the rate is around 7.75% per annum, simple interest.
Conversely, HMRC pays repayment interest on VAT refunds it owes you, at a lower rate (currently around 4.25% per annum).
How to reset your points balance to zero
Once you've reached the points threshold, you reset by:
- Submitting every return on time for the "compliance period" — 12 months for quarterly returns, 6 months for monthly, 24 months for annual
- Bringing all of your previous returns up to date (any outstanding returns must be filed)
Hit both conditions and your points reset to zero automatically. Miss either (e.g. one late submission during the period) and the clock starts again.
How to appeal a penalty
You can appeal a VAT penalty if you have a "reasonable excuse" — HMRC's term for circumstances beyond your control. Examples that have succeeded:
- Serious illness of you or a close family member around the deadline
- Bereavement
- HMRC system outage at the time of filing (these do happen)
- Unexpected hospitalisation
- Theft of records, fire or flood at premises
Examples that do not count as reasonable excuse:
- Being too busy
- Your accountant being late
- Forgetting
- Software issues you didn't try to resolve
- Cashflow problems (separate appeal route — Time to Pay)
Appeal within 30 days of the penalty notice. Use HMRC's online appeal form via your tax account, or write giving the reference number, the reason, and any evidence. If HMRC rejects your appeal, you can take it to the First-tier Tax Tribunal — free, no lawyers required, but takes 6–12 months.
How to avoid penalties entirely
- Set up Direct Debit — HMRC collects automatically. You get an extra 3 working days. The single most effective move.
- Calendar the deadlines — VAT periods don't change. Put each one in your calendar a week early.
- Move to monthly returns if you're in repayment — HMRC pays you faster, you can't be late on a £0 payment.
- Use accounting software with auto-submission — Xero, QuickBooks etc. will queue and submit your return.
- Call HMRC at day 14 if you can't pay. A Time to Pay arrangement has no penalty if set up before day 15.
FAQ
Can I get the £200 penalty waived for a first-time mistake?
Not automatically — but if you have a genuine reasonable excuse and it's your first incident, HMRC's penalty caseworkers are often pragmatic. Appeal in writing.
Does the points system carry over from the old default surcharge regime?
No. The old surcharge regime ended for periods starting 1 January 2023. Anyone who was in the old surcharge had their position reset.
What if I submit a nil return late?
You still get a point. The point system is about submission, not about whether you owe anything. If you have nothing to declare, submit on time anyway.
Can I lose the £200 penalty if I appeal?
Yes — successful appeals get the penalty cancelled. Points can also be removed from your record if HMRC accepts the appeal applies to a specific late submission.
Do penalties apply to MTD-related failures?
Separately, yes. There are MTD-specific penalties for failure to use functional compatible software (£100–£400 per return), failure to keep digital records (£5–£15 per day) and failure to use digital links. See our MTD guide.
Sources & further reading
All claims verified against the following primary sources on 4 May 2026.
- HMRC – Penalties for late submission of VAT returns
- HMRC – Penalties for not paying VAT
- HMRC – Penalty points and penalties: VAT
- HMRC – How to appeal a tax decision
About the editorial team
Reverse VAT Calculator Editorial Team
Every article is written by a UK-qualified accountant (ACCA, FCCA, ACA or CTA) and reviewed by a second qualified team member before publication.
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