VAT late payment penalties are charged by HMRC in two stages after your VAT due date passes: a first penalty of up to 4% of the unpaid VAT, followed by a second penalty that accrues daily at 4% a year until you pay in full. Late payment interest is charged on top, separately from any penalty. Together these can add a meaningful amount to a VAT bill that is already hard to clear.
This points-based regime replaced the old default surcharge for VAT periods starting on or after 1 January 2023. It is designed to be more proportionate for a single missed deadline, but it can still escalate quickly if a company falls behind on more than one return. This guide walks through how the penalties and interest are worked out, and what options a director has if VAT arrears are already building up.
How VAT penalties changed: points instead of surcharges
Until the end of 2022, a late VAT payment triggered the default surcharge — a single percentage charge that rose each time you were late again within 12 months. HMRC replaced this with two separate systems that now run side by side:
- Late submission penalty points — for filing your VAT return late, regardless of whether you owed anything.
- Late payment penalties — for paying the VAT you owe after the due date.
Late payment interest is charged separately from both of these, on any VAT paid late. Understanding which of the three applies to your situation is the first step in working out what you actually owe.
Late submission penalty points and the £200 threshold
Each time a VAT return is submitted late, HMRC adds one penalty point to your record. Once your points reach a set threshold, HMRC charges a flat £200 penalty — and a further £200 for every subsequent late return while you remain at the threshold.
The threshold depends on how often you file:
- Quarterly VAT returns — threshold of 4 points.
- Monthly VAT returns — threshold of 5 points.
- Annual VAT returns — threshold of 2 points.
Points expire after a period of consistent, on-time filing (24 months for most quarterly filers), so a single late return early on need not follow a business indefinitely. This points system covers the paperwork side of compliance; it is separate from the VAT late payment penalties charged when the money itself arrives late.
First and second VAT late payment penalties explained
The late payment penalty is worked out in stages, based on how many days have passed since the VAT due date:
- Days 1–15: no penalty, provided you pay in full or agree a Time to Pay arrangement with HMRC within this window.
- Day 15 onward (first penalty): a penalty of 2% of the VAT unpaid at day 15.
- Day 30 onward (first penalty increases): the first penalty rises to 4% of the VAT unpaid at day 30 (2% calculated at day 15, plus a further 2% at day 30).
- Day 31 onward (second penalty): a second penalty starts, calculated daily at an annual rate of 4% on the outstanding balance, continuing until the VAT is paid or a payment plan is agreed.
In practice, this means the cost of lateness rises the longer a VAT debt sits unpaid. A company that pays in full on day 20 faces a modest 2% first penalty. A company that is still unpaid on day 60 is carrying both the increased first penalty and a month of the daily second penalty. HMRC's guidance on late payment penalties and interest sets out the full mechanics: HMRC's guidance on late payment penalties and interest.
How HMRC charges late payment interest on VAT
Separately from the penalties above, HMRC charges late payment interest on any VAT paid after the due date. This runs from the first day the payment is overdue until the date it is paid in full, calculated daily on the outstanding amount.
The rate is set at the Bank of England base rate plus 2.5%, so it moves when the base rate changes. Because this is a variable, time-sensitive figure, it is worth checking the current rate rather than relying on a fixed percentage — our companion article, HMRC Late Payment Interest Rate Explained, covers how the rate is set and how to work out what has accrued. HMRC also publishes the current figure directly: HMRC's guidance on interest charged on late VAT and penalties.
Can you appeal or get penalties reduced?
You can appeal a late payment penalty if you have a reasonable excuse — a genuine, unavoidable reason the payment was late, such as a serious illness, a system failure at HMRC, or an unexpected and unforeseeable event. Ordinary cash flow pressure is not usually accepted as a reasonable excuse on its own.
Steps to challenge a penalty include:
- Requesting an internal review by HMRC within 30 days of the penalty decision.
- Providing evidence to support the reasonable excuse, such as correspondence or records of the circumstances.
- Appealing to the tax tribunal if HMRC's review does not resolve the matter.
Agreeing a Time to Pay arrangement before or shortly after the due date can also stop the second late payment penalty from accruing further, even where the debt itself has not yet been cleared. The legal basis for the current penalty regime sits in the Finance Act 2021, implemented through HMRC's published guidance on late submission penalties: HMRC's guidance on late submission penalties.
Reducing exposure when you already have arrears
If VAT arrears have already built up, the priority is usually to stop the position getting worse rather than to focus solely on past penalties. A few practical points:
- Paying even part of the VAT due reduces the balance the second penalty and interest are calculated against.
- Contacting HMRC before a payment is significantly overdue, rather than after, generally gives more room to agree a manageable arrangement.
- Persistent VAT arrears alongside penalties and interest can be a sign of a wider cash flow problem that needs addressing at company level, not just return by return.
If VAT debt is one part of a broader HMRC arrears picture, our article on Owe HMRC and Can't Pay? Your Options sets out the range of routes available to a company in that position. Where VAT specifically is the issue, Can't Pay Your VAT Bill? What Happens Next looks at what HMRC typically does next and how directors usually respond.
Frequently asked questions
What counts as a reasonable excuse for a late VAT payment?
A reasonable excuse is an unexpected, unavoidable event that stopped you paying on time, such as serious illness, a bereavement, or a failure in HMRC's own systems. General financial difficulty is not normally treated as a reasonable excuse, though HMRC will still consider a Time to Pay request in that situation.
Is there still a grace period before VAT late payment penalties apply?
Yes. No penalty applies if you pay in full, or agree a Time to Pay arrangement, within 15 days of the VAT due date. The first penalty only starts to apply from day 15 onward.
Do penalty points affect late payment penalties too?
No. Penalty points and the £200 charge relate to late submission of the VAT return itself. Late payment penalties are a separate calculation based purely on how late the payment is and how much is outstanding.
How long do I have to appeal a VAT penalty?
You generally have 30 days from the date of the penalty decision to ask HMRC for a review or to appeal to the tax tribunal.
What happens if I keep being late with VAT payments?
Each late payment is assessed on its own facts, so penalties and interest can apply repeatedly across different VAT periods. Persistent lateness also increases the likelihood that HMRC will look more closely at the company's overall compliance and payment history.
This article is general information, not legal, financial or insolvency advice, and does not cover every circumstance. If VAT arrears, penalties or interest are becoming difficult to manage, Harbourfirst can introduce you to a regulated insolvency specialist to talk through your options — start an enquiry.