Are you aware of the changes to VAT penalties?

The VAT default surcharge regime is going to be replaced by a new penalty system with effect from 1 January 2023. We have set out the new rules below.

Dated: 12 December 2022 Author: Terri Bruce, Taxation Partner, Indirect Tax: SME and Not For Profit

Penalties For Late VAT Returns

HMRC will allocate a taxpayer 1 point each time a filing deadline is missed.  Points for late returns will expire after two years unless penalty thresholds are breached.  A £200 fine will be imposed for every late submission after the threshold is breached.

Type of VAT Return


Annual VAT returns        

2 points

Quarterly returns            

4 points

Monthly returns              

5 points

Points can be reset if you meet a test of good compliance for a specified period.

Penalties For Late Payment of VAT

There will be two penalties applied to late payments, a fixed penalty, and a daily penalty. Interest will also be charged.

Days Late


Up to 15 Days late

No penalty if HMRC receives the VAT payment or agrees to a payment plan before the end of day 15.

Between 16 and 30 days late

2% penalty based on the outstanding VAT on day 15.

31 days late or more

Penalties as above plus an additional 2% fixed penalty calculated based on the amount outstanding at day 30 (ie a total of 4% if nothing has been paid)  

After day 31

4% daily penalty on the amount outstanding until the balance is paid or a payment plan implemented.


Avoiding a penalty

When businesses are unable to meet their VAT payment obligations, they should engage with HMRC and set up a Time to Pay agreement, thereby avoiding more severe penalties. When an instalment payment plan is put in place, the standard interest charges on late payments are frozen from that day and will not be enforced if the payment plan is adhered to.

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