HMRC replaced the default surcharge system with a new penalty regime for VAT return periods beginning on or after 1 January 2023.
Part of the new system penalises businesses for the late payment of VAT amounts that fall due. This may be for example, by way of the filing (or late filing) or a VAT return, an error correction filed by the VAT registered person, or an assessment made by an HMRC officer.
The penalty rates were initially as follows; a 2% penalty charged 16 days after the VAT first became due, by reference to the VAT owed at day 15. A further 2% penalty charged after 31 days based on any amount still outstanding at day 30, and a daily penalty equal to a pro-rated 4% per annum on any amounts that remain outstanding thereafter.
In addition to the penalties, late payment interest is also charged by HMRC on any VAT amounts, and on the penalties themselves, which are not paid on time.
Many thought that the penalty rates were low, and they have now been increased by HMRC (from 1 April 2025), as follows –
VAT Late Payment Changes: Penalties and Interest
- From 2% to 3% at 15 days,
- From 2% to 3% at 30 days, and
- From 4% to 10% per annum from day 31
This is a significant rise and means it is now even more important that a business meets its VAT reporting obligations in a timely and efficient manner.
It is recommended that a business facing difficulty in making VAT payments on time contacts HMRC to discuss setting up a payment plan. Plans can usually be set up online for amounts owing of less than £100,000 which the VAT registered person intends to pay off within the next 12 months.
A payment plan will avoid the business incurring the penalties above, but HMRC will still charge interest on amounts that remain outstanding. The rate that applies to late payment interest charged by HMRC has also increased (from 6 April 2025) from a rate set at the Bank of England’s base rate plus 2.5% to a rate set at the Bank of England’s base rate plus 4%.
If your business is struggling to meet its VAT payment or other compliance obligations, get in touch with The VAT Consultancy’s highly experienced team today to discuss how we can help.
