The UK’s legislative tax authority HMRC has changed the way VAT-registered businesses are penalised following the late submission of VAT returns. It has also recently increased the interest fine for late VAT payment, both for first and second late-payment penalties.
As of 2026, these changes are in effect, meaning that if you miss a monthly, quarterly, or annual VAT return or payment deadline, you could face a series of costly penalties.
With over 40 years of dedicated experience helping my clients navigate the complexities of the UK’s VAT system, I know just how stressful submitting and paying VAT bills can be, but it doesn’t have to be. Minimise the risk of your business being fined or accruing penalty points today, by following this UWM guide to VAT late payment penalties and interest rates.
Contents:
- Overview
- Who do HMRC’s VAT penalties and interest rates apply to?
- Which late VAT actions incur penalty points vs fines?
- VAT deadlines for sole traders and other businesses
- VAT and Making Tax Digital
- How HMRC’s VAT late-return penalty system works
- Avoid VAT late payment penalties and interest with UWM
An overview of HMRC’s VAT penalties and interest scheme
In previous years, His Majesty’s Revenue and Customs (HMRC) did not penalise VAT-registered businesses—from sole traders to small limited companies and large multinational enterprises—for late submission of their VAT returns. Nor did HMRC charge interest on late payments.
Instead, a surcharge penalty was applied to any and all VAT payments paid after the relevant deadline. The surcharge was calculated at a percentage of the VAT payment amount, depending on the business’s history of payment deadline compliance.
This changed, however, with the introduction of a new VAT late payment penalty and interest scheme, brought into effect on 1st January 2023. Under the new scheme, businesses may be slapped with financial penalties for late submission of returns, as well aspayments, andwill accrue interest on payments made later than 15 days after their VAT payment deadline.
Who do HMRC’s VAT penalties and interest rates apply to?
VAT late payment penalties and interest rates apply to any self-employed individual or business which is VAT-registered. This includes, for example, VAT-registered landlords of both residential and holiday let properties, and retail businesses with turnover above the VAT threshold.
If you are unsure about whether VAT legislation applies to you, be sure to seek the advice of a tax specialist.
Do I need to be VAT registered?
HMRC sets a universal taxable turnover threshold above which businesses of any size must legally register for VAT. The current VAT threshold, as of fiscal year 2026/27, is £90,000 per annum. Thus, if your business turns over taxable turnover of £90,000 or more a year, you must register your business for VAT.
Of course, you can also voluntarily register for VAT if you so choose, regardless of turnover. There are pros and cons to doing so, which you should carefully consider before making a decision.
Which late VAT actions incur penalty points vs fines?
Under the latest legislation on Value Added Tax, HMRC can either hit businesses with penalty points or interest-calculated fines for late actions.
Penalty points for late submission of VAT returns
Penalty points are reserved for penalising businesses and individuals who submit their VAT returns after the deadline. As I explain in greater detail later, businesses are given one penalty point for every late filing; once a certain number of penalty points is accrued, they’ll receive a set £200 fine.
Interest-based fines for late payment of VAT
Late payment of VAT is penalised differently to late filing of VAT returns. When VAT payment is made 16 days or more after a business’s payment deadline, the business is hit with a fine calculated as a percentage of the outstanding amount. I’ll also explain this in more detail shortly, but for now, it’s worth noting that there is a ‘first late payment penalty’ on VAT payments made between 16 and 30 days late, and a ‘second late payment penalty’ on VAT payments made more than 31 days late.
There are a few different types of VAT payments to which these late payment penalties apply:
- Payments due on your business’s VAT Return
- Payments due following an amendment or correction to a business’s VAT return
- Payments calculated as due via a VAT assessment HMRC may issue when a business fails to submit a return
- Payments due on a VAT assessment HMRC may issue businesses for other reasons
VAT deadlines for sole traders and other businesses
Given the increased potential for incurring a VAT late payment penalty, interest on late VAT payments, or a penalty for submitting a VAT return past the deadline, it is more important than ever to be aware of your business’s unique VAT accounting deadlines.
The deadline for submitting your VAT return is one calendar month and one week from the end of your VAT accounting period, if you submit monthly or quarterly VAT returns. This is also the deadline for making a payment to HMRC for your VAT liability. After this date, you will enter penalty and interest territory.
Some businesses can alternatively register for annual VAT returns, but they must turn over £1.35m or less. If you submit an annual VAT return, the deadline for submission of the return is two months after the VAT accounting period.
VAT and Making Tax Digital
There is one other key change to the way businesses file, pay, and are penalised for VAT which you must be aware of, and that’s the nationwide rollout of Making Tax Digital, or MTD.
Making Tax Digital is HMRC’s new digital-transition scheme designed to modernise the UK tax system by bringing all filing and payments fully online. Under MTD, self-employed individuals and VAT-registered businesses alike must use HMRC-compatible software to either file their tax returns or to bridge their digital recordkeeping (such as spreadsheets) to the HMRC system.
Making Tax Digital applies to all VAT-registered businesses, no matter how big or small. As a VAT-registered business, you must, as of 2026/27 onwards, be using compatible software to record, file and pay VAT. This may also apply to self-employed traders whose side-hustle income has grown to meet the annual VAT turnover threshold.
If unsure about which software is best for your business needs, or you could use a little help making sure you’re staying MTD VAT compliant, I’d highly recommend getting in touch with a local VAT accountant for some friendly professional advice.
How HMRC’s VAT late-return penalty system works
One of the most notable changes to HMRC’s VAT penalties and interest scheme is the introduction of a points-based penalty plan for late VAT return filing, as we mentioned earlier. This works a little like accruing points on your driver’s license.
Another major change is the inclusion of nil returns and VAT repayment returns within the penalty and interest scheme. Both of these types of returns used to be exempt from penalty, but are now also at threat. This potentially creates a riskier situation for small businesses and businesses collecting low-to-no VAT.
Late VAT return filing penalties
VAT returns filed late will trigger a points-based penalty scheme. A point is awarded every time you are late in filing your return, with an associated financial penalty of £200 triggered when you reach a certain amount of points.
Once you have surpassed the first points threshold, additional £200 penalties will be applied every time you file a late return—i.e. accrue a new point—until your points are reset. Points are only reset to nil following a period of compliance (i.e., filing and paying VAT on time for a year without further penalty).
The points threshold and reset rules differ depending on your VAT submission period.
| Submission Period | Points Threshold | Points Reset to Nil |
| Annual VAT Returns | 2 | After 2 returns submitted on time |
| Quarterly VAT Returns | 4 | After 4 returns submitted on time |
| Monthly VAT Returns | 5 | After 6 returns submitted on time |
How HMRC’s late VAT payment fines and interest scheme works
If, rather than submitting your VAT return late, you are late to pay the VAT you owe HMRC, you will be penalised differently. Late VAT payments are fined doubly: firstly as interest charged daily on the outstanding amount, and secondly as a late payment penalty, also calculated as a percentage of the outstanding amount.
Late VAT payment interest
From the first day your business’s VAT payment is late to the day it’s paid, HMRC will charge you interest on the outstanding amount, calculated at the Bank of England base rate + 4%.
For example: Having submitted your VAT return, you owe HMRC £20,000 in VAT, due on May 7th. However, you fail to pay your VAT bill by the deadline, instead settling it on May 10th. You are charged interest on the late payment for three days at the Bank of England base rate (4.5%, for the purposes of this example) + 4%. In addition to your £20,000 VAT bill, you owe the following in interest: £20,000 x 8.5% x 3 days ÷ 365 days = £13.97.
Late VAT payment penalties
An additional financial surcharge penalty may also beapplied to any business or individual who makes a late VAT payment. However, this penalty system only comes into effect following an initial 15-day grace period past the deadline.
In other words, whilst your overdue balance will accrue interest as detailed above, you will only be penalised further once the due date is surpassed by 15 days or more. Here’s how penalties on late payments of VAT break down:
- VAT payments made up to 15 days past the deadline incur no penalty, only interest.
- VAT payments made 16-30 days past the deadline incur both interest and a ‘first late payment penalty,’ calculated at 3% of the total amount owed.
- VAT payments made 31+ days past the deadline incur a ‘second late payment penalty,’ in addition to interest and a double ‘first late payment penalty,’ which is calculated at a daily rate of 10% per year on the full outstanding balance. This second late payment penalty is charged every day, from day 31 until either:
- The outstanding balance is paid in full
- The end of the two-year assessment time limit, at which point, should your VAT bill remain outstanding, the penalty is re-assessed.
For example: You file a VAT return for £20,000 and are late in payment, here’s what you could be charged as a penalty:
- You pay your £20,000 VAT bill within 15 days of the deadline passing, incurring no penalty charge.
- You pay your £20,000 VAT bill between 16 and 30 days of the deadline passing, incurring a ‘first late payment penalty,’ calculated at 3% of the total amount owed = £600.
- You pay your £20,000 VAT bill on day 51 after the payment deadline. You are penalised with a double first late payment penalty of £1,200 (3% of the amount outstanding at day 15 and 3% of the amount outstanding at day 30), as well as a second late payment penalty calculated at a daily 10% on the outstanding amount across the twenty-day period from day 31 to when you paid your bill in full.
- £20,000 x 10% x 21÷ 365 days) = £115.07
The full amount due for paying your £20,000 VAT bill 51 days late is £1,309.59:
- First late payment penalty of £1,200
- Second late payment penalty of £115.07
Avoid VAT late payment penalties and interest with UWM
The simplest way to avoid accruing points, incurring penalties, and being charged interest on late VAT payments is to ensure you file your VAT returns on time and pay the full amount due on or before your payment deadline.
Of course, mistakes happen, and not everyone has the cash to hand to pay their VAT bill in full, every time.
To minimise costs, even when you can’t afford to pay the full VAT amount on your return, it is crucial that you nevertheless file the return on time. At this point, you can contact HMRC to set up a ‘Time to Pay’ plan, which can reduce or even negate any penalties which would otherwise have applied.
The most cost-effective way to comply with HMRC’s new VAT laws—whilst avoiding the risk of penalties and costly interest rates—however, is to team up with a VAT tax specialist. The team at UWM has over 40 years of experience assisting both individuals and businesses with VAT and tax compliance.
Don’t run the risk of incurring a VAT late payment penalty or interest on your late VAT payment. Contact UWM Accountants today.
