Updated October 2026: corrected and updated for the current VAT penalty rules.
For VAT return periods starting on or after 1 January 2023, HMRC introduced a new penalty system that replaced the old Default Surcharge. There are separate penalties for submitting VAT returns late and for paying VAT late.
Late submission: the points system
You receive one penalty point for each VAT return you submit late. When you reach the points threshold, you are charged a £200 penalty. The threshold depends on how often you submit your VAT returns:
Annual submissions: 2 points
Quarterly submissions: 4 points
Monthly submissions: 5 points
While you are at the threshold, every further late return triggers another £200 penalty.
Do penalty points expire?
If you have not reached the threshold, each point expires after 24 months. Once you reach the threshold, your points are only reset to zero after a period of filing every return on time (12 months for quarterly filers), as long as all returns due in the previous 24 months have been submitted.
Late payment penalties
Late payment is penalised separately. Since 1 April 2025:
- no penalty if you pay in full, or agree a payment plan, within 15 days of the due date
- 3% of the VAT outstanding at day 15, plus a further 3% of the VAT still outstanding at day 30
- from day 31, a further penalty charged at 10% a year on the outstanding balance
Late payment interest is also charged from the day after the due date, at the Bank of England base rate plus 4%.
For a fuller explanation with examples, read our comprehensive guide to the VAT penalty regime.
Making Tax Digital penalties
All VAT-registered businesses must keep digital records and file VAT returns using compatible software under Making Tax Digital. Separate penalties can apply for failing to do so, for example not keeping digital records or not having digital links between software.
How can I avoid penalties?
- Use MTD-compatible software with digital links in place
- Submit your VAT returns on time, including nil returns
- Pay on time, or contact HMRC early to agree a Time to Pay arrangement
Looking beyond the stick to the carrot
In addition to avoiding penalties, good digital record keeping can offer businesses a number of benefits, such as:
- Improved efficiency
- Reduced risk of errors
- Better visibility of financial performance
- A springboard to digital transformation
Need help with VAT? See our VAT service or contact us.