VAT Penalties: Points, Late Payment, and Appeals

VAT penalties in the UK cover four things HMRC cares about: filing your return on time, paying on time, getting the numbers right, and registering when your turnover crosses the threshold. Each has its own penalty structure, interest runs on top of unpaid tax regardless, and rates jumped in April 2025. The regime you are working under took effect for VAT periods starting on or after 1 January 2023 and replaced the old default surcharge system.¹

Late Filing: The Points System

HMRC gives you one penalty point every time a VAT return misses its deadline. Points on their own cost nothing. The financial penalty kicks in when you hit a threshold set by how often you file:²

Annual filers hit the threshold at 2 points
Quarterly filers hit it at 4 points
Monthly filers hit it at 5 points

Once you reach the threshold, HMRC charges £200 for that late return and another £200 for every further late return while you remain at the threshold. Occasional slips are absorbed by the points; persistent lateness compounds.

Clearing Your Points

You can reset your points to zero by filing every return on time for a compliance period that varies by frequency: 6 months for monthly filers, 12 months for quarterly filers, and 24 months for annual filers.³ Any overdue returns from earlier periods must also be filed before the compliance clock starts. One missed deadline in the compliance period restarts it.

Late Payment: Escalating Charges

Late payment penalties are separate from filing penalties and apply even if the return itself was on time. Rates rose sharply on 1 April 2025.¹

Nothing is charged if you pay within 15 days of the due date. After that:

From day 16, a first penalty of 3% of the VAT still owed at day 15
From day 31, that first penalty rises: 3% of the day-15 balance plus another 3% of whatever remains unpaid at day 30
From day 31, a separate second penalty starts running daily at an annualised rate of 10% on the outstanding balance, until you pay in full or agree a Time to Pay arrangement

The daily second penalty is the part that hurts on larger debts, because it keeps accruing every day the balance sits unpaid.

Time to Pay

Contacting HMRC to agree a Time to Pay arrangement can cut or wipe out the late payment penalties, and the earlier you do it the more you save:¹

Agree within days 1 to 15 and you avoid all late payment penalties
Agree between days 16 and 30 and you avoid the day-31 uplift but still owe the initial 3%
Agree from day 31 and the daily second penalty stops growing, but everything already accrued stands

Plans typically run between 3 and 12 months, and you must stay current on any new VAT liabilities during that time. Break the terms and HMRC can cancel the arrangement and charge penalties as if it had never existed. The way in is HMRC’s payment support service.

Interest on Unpaid VAT

Interest is not a penalty and is not discretionary. It runs from the day after the payment was due until the balance clears.⁴ Since 6 April 2025 the rate has been the Bank of England base rate plus 4 percentage points, up from base plus 2.5% previously.⁵ With the base rate at 3.75% in early 2026, the late payment interest rate is 7.75%.⁶ HMRC cannot waive interest even where a reasonable excuse applies to the underlying penalty.

Inaccurate Returns

Errors that understate the tax, inflate a loss, or produce a false repayment claim can trigger inaccuracy penalties under Schedule 24 of the Finance Act 2007.⁷ HMRC first classifies your behaviour, which sets the maximum penalty:

Careless (failure to take reasonable care): up to 30% of the potential lost revenue
Deliberate but not concealed: up to 70%
Deliberate and concealed: up to 100%

HMRC must then reduce the penalty for disclosure. How far it drops depends on whether the disclosure was unprompted (you came forward before HMRC was onto it) or prompted (they already were):

Careless: as low as 0% unprompted, or 15% prompted
Deliberate but not concealed: as low as 20% unprompted, or 35% prompted
Deliberate and concealed: as low as 30% unprompted, or 50% prompted

The quality of the disclosure also affects where in the range you land: timing, how fully you explain the error, and how much access you give to records. Complete records offered promptly move you toward the floor. Partial cooperation keeps the penalty higher.

Failure to Register

A business must register for VAT once its taxable turnover exceeds £90,000 over a rolling 12-month period.⁸ You have 30 days from the end of the month in which you crossed the threshold to notify HMRC.⁹ Miss the window and a failure-to-notify penalty applies.

The penalty is a percentage of the VAT you should have charged from your effective registration date until HMRC discovers the omission. As with inaccuracy penalties, HMRC bands the behaviour as non-deliberate, deliberate, or deliberate and concealed, then applies reductions for the quality and timing of disclosure. The minimum penalty is £50.¹⁰ Growing businesses get caught by this often, because turnover is usually reviewed at year-end rather than monthly. If yours is approaching £90,000, track it every month.

Reasonable Excuse

HMRC will cancel a penalty if you had a reasonable excuse for the failure and you put things right as soon as you were able. Knowing what qualifies stops wasted appeals.¹¹

Things that may count:

The death of a partner or close relative shortly before the deadline
An unexpected hospital stay that prevented you from handling your tax affairs
A serious or life-threatening illness
Computer or software failure while preparing the return
Problems with HMRC’s own online services
Fire, flood, or theft preventing completion of the return
Unpredictable postal delays
Delays related to a disability or mental health condition

Things that do not:

Not having enough money (a bounced payment is not a reasonable excuse)
Finding HMRC’s online system difficult to use
Not receiving a reminder from HMRC
Making a simple mistake on your return

That last one catches people out. An honest error on the return itself is not a reasonable excuse for the resulting inaccuracy penalty. Reasonable excuse is for procedural failures such as filing or paying late, not for the accuracy of the figures you submitted.

How to Appeal a VAT Penalty

You have 30 days from the date of the penalty notice to respond. The simplest route is through your VAT online account, where you can accept HMRC’s offer of a review.¹² A different officer then re-examines the facts. You do not need to pay the penalty while the review is running, though interest continues to accrue on any underlying VAT debt.

If the review upholds the penalty, you can escalate to the First-tier Tribunal (Tax Chamber), an independent court whose decisions are legally binding. You can also go straight to the tribunal within the same 30-day window and skip the review, though the review usually resolves things faster and costs nothing. Miss the 30 days and you will have to explain the delay; the tribunal has discretion to refuse a late appeal.

1
GOV.UK. How Late Payment Penalties Work if You Pay VAT Late
2
GOV.UK. Penalty Points and Penalties if You Submit Your VAT Return Late
3
GOV.UK. Remove Penalty Points Youve Received After Submitting Your VAT Return Late
4
GOV.UK. Late Payment Interest if You Do Not Pay VAT or Penalties on Time
5
GOV.UK. HMRC Interest Rates for Late and Early Payments
6
Bank of England. Bank Rate History and Data
7
Legislation.gov.uk. Finance Act 2007 – Schedule 24
8
GOV.UK. Increasing the VAT Registration Threshold
9
GOV.UK. Compliance Checks – Penalties for Failure to Notify – CC/FS11
10
GOV.UK. Late VAT Registration Penalty (VAT Notice 700/41)
11
GOV.UK. Disagree With a Tax Decision or Penalty – Reasonable Excuses
12
GOV.UK. Disagree With a Tax Decision or Penalty