Updated October 2026: late payment penalty and interest rates revised for the increases that took effect in April 2025.
The VAT penalty and interest rules changed for VAT return periods starting on or after 1 January 2023. The Default Surcharge was replaced by separate penalties for late submission and late payment, and interest rules were brought into line with other taxes, including Repayment Interest, which replaced the Repayment Supplement.
In this blog post, we explain how the rules work today and how they might affect your business.
Overview of the Penalty Regime
The penalties cover both late submissions and late payments. The same approach is being extended to Income Tax Self Assessment as Making Tax Digital for Income Tax is introduced. The aim is to differentiate between occasional mistakes and persistent non-compliance.
Late Submission Penalties: A Points-Based System
Each late VAT return earns a penalty point, including nil and repayment returns. Once you reach the penalty threshold, you receive a fixed penalty of £200, and another £200 penalty for each further late return while you are at the threshold.
The penalty threshold varies based on how frequently submissions are made.
| Submission Frequency | Penalty Threshold |
| Annual | 2 points |
| Quarterly | 4 points |
| Monthly | 5 points |
Example – Quarterly VAT Return:
Consider a business that files VAT returns quarterly. If the return for the quarter ending 30 April is late (1 point), the following will occur:
- The 31 July return is on time (no additional points, still at 1 point).
- The 31 October and 31 January returns are both late (2 more points, now at 3 points).
- The following 30 April return is late (4th point), triggering the first £200 penalty.
Each further late return would incur an additional £200 penalty while the points remain at the threshold.
Resetting Penalty Points
If you reach the penalty threshold, your points are reset to zero once you meet both of these conditions:
- You submit all returns on time for a period of compliance (12 months for quarterly filers, 6 months for monthly filers, 24 months for annual filers).
- You have submitted all returns due in the previous 24 months.
If you have not reached the threshold, each point expires automatically after 24 months.
Late Payment Penalties
Late payment penalties increase the longer a payment is overdue. The rates were increased from 1 April 2025:
- Up to 15 days overdue: no penalty if you pay in full or agree a payment plan.
- First penalty: 3% of the VAT outstanding at day 15, plus a further 3% of the VAT still outstanding at day 30.
- Second penalty: from day 31, charged daily at a rate of 10% a year on the outstanding balance until it is paid.
Agreeing a Time to Pay arrangement with HMRC can stop these penalties building up. See HMRC’s guide to how late payment penalties work.
Interest on Late Payments and Repayments
| Interest Type | Before 1 January 2023 | Current Rule |
| Late Payment Interest | No interest charged on most late VAT payments. | Charged from the first day a payment is overdue until it is paid. Since 6 April 2025 the rate has been the Bank of England base rate plus 4%. |
| VAT Repayment Interest | A 5% repayment supplement was applied if repayment was not made within 30 days. | Repayment Interest applies at the Bank of England base rate minus 1% (with a minimum rate of 0.5%), from the day after the return was due or submitted, whichever is later. |
Impact on Businesses
Occasional short delays cost less than under the old Default Surcharge, but prolonged late payment is now considerably more expensive, especially since the 2025 increases. Filing on time and paying promptly, or agreeing a payment plan early, is the best protection.
Need help keeping your VAT returns on track? See our VAT service or contact us.