What are the penalties for submitting a late VAT return?

This guide explains the penalties for submitting a late VAT return including the VAT penalty points system, late payment charges, interest and how to reset your points.

Submitting a VAT return late is something many businesses worry about, often because they do not understand how HMRC’s penalty system works or how quickly fines can build up. In my opinion VAT penalties are some of the strictest HMRC administers because VAT is considered a trust tax. Businesses collect VAT on behalf of the government and HMRC expects accuracy and timely returns. With the introduction of the VAT penalty and interest regime in 2023 the rules have changed significantly, and the new system affects every VAT registered business.

This guide explains the penalties for submitting a late VAT return under the new points based regime, including how points accumulate, when financial penalties apply, how late payment penalties work, how interest is charged, what happens if you repeatedly file late, how to appeal and the practical steps you can take to avoid further penalties. By the end you will clearly understand the consequences of missing a VAT return deadline and how to get back on track.

First: the penalty system changed from January 2023

Before 2023 HMRC used a default surcharge system for late VAT returns and late payments. This has now been replaced by two separate systems:

  1. A late submission penalty system

  2. A late payment penalty system

These apply independently. You can be penalised for submitting the return late even if you paid your VAT on time, and you can be penalised for paying late even if you submitted the return on time.

In my opinion this new system is clearer and more consistent, but also easier to trigger if you miss a single deadline.

1. Late submission penalties: the points based system

HMRC now uses a points system for late VAT returns. If you miss a return deadline you receive a penalty point. Once you reach the penalty threshold you receive a £200 financial penalty, and every late submission after that triggers another £200 penalty.

Penalty points are given when:

  • A VAT return is submitted late

  • A nil return is submitted late

  • A repayment return is submitted late

It does not matter if no VAT is owed. The deadline still applies.

How the late submission penalty system works

Step 1

Each late VAT return earns you one penalty point.

Step 2

If your total points reach your penalty threshold, you receive a £200 penalty.

Step 3

Every late VAT return after the threshold triggers another £200 penalty.

Step 4

You stop gaining points only when you meet two requirements:

  • You submit returns on time for a compliance period

  • You submit all outstanding VAT returns

In my opinion this system forces businesses to remain consistently compliant or face ongoing financial penalties.

Penalty thresholds based on VAT filing frequency

Your penalty threshold depends on whether you file monthly, quarterly or annually.

Quarterly returns

  • Threshold: 4 points

  • After 4 late returns you get the £200 penalty

  • Every additional late return adds £200

  • Compliance period to reset: 12 months

Monthly returns

  • Threshold: 5 points

  • Compliance period: 6 months

Annual returns

  • Threshold: 2 points

  • Compliance period: 24 months

Example

You file quarterly returns.
You submit 4 VAT returns late.
You now receive a £200 penalty.
If you submit the next return late you get another £200 penalty.

In my opinion this means even occasional lateness can quickly become expensive.

Do penalty points expire?

Penalty points do not expire automatically. You must meet both conditions:

  1. Complete a period of compliance without any late submissions

  2. Submit any outstanding VAT returns

Once both are met, your points reset to zero.

2. Late payment penalties: charged separately

Submitting the VAT return late is only one part of the system. Paying the VAT late triggers a separate penalty regime.

Penalties for late payments:

1. No penalty if the VAT is paid within 15 days of the due date

HMRC gives a short grace period.

2. Between 16 and 30 days late

You are charged a 2 percent penalty on the VAT outstanding at day 15.

3. More than 30 days late

You are charged:

  • 2 percent of the VAT outstanding at day 15

  • 2 percent of the VAT outstanding at day 30

  • Ongoing penalties daily at a rate equivalent to 4 percent per year until paid

In my opinion this structure is much harsher than many businesses realise.

Late payment interest

On top of penalties, HMRC charges late payment interest from the day VAT becomes due until it is paid.

  • Interest rate = Bank of England base rate + 2.5 percent

  • Interest continues until the full amount is paid

Even small delays can add extra costs quickly.

What happens if you repeatedly submit VAT returns late?

Repeated lateness triggers:

  • Accumulated penalty points

  • Multiple £200 penalties

  • More HMRC scrutiny

  • Possible VAT compliance checks

  • Increased risk of a VAT inspection

  • Potential removal from certain VAT schemes

If you show consistent poor compliance HMRC may decide your business is high risk.

In my opinion the points system is designed to identify and monitor ongoing non compliance.

How to reset your penalty points

To remove your penalty points you must complete:

  1. A compliance period with no late submissions

  2. Submission of all outstanding returns

Compliance periods:

  • Quarterly: 12 months

  • Monthly: 6 months

  • Annual: 24 months

Only once both conditions are met will HMRC reset your points to zero.

Can you appeal VAT penalties?

Yes. You can appeal a penalty if:

  • You had a reasonable excuse

  • HMRC made an error

  • You submitted on time but HMRC systems failed

  • You believe the penalty is incorrect

HMRC considers “reasonable excuse” to include:

  • Serious illness

  • Bereavement

  • IT failures outside your control

  • Fire, flood or theft

  • Unexpected system errors

  • Software issues that prevented submission

They will not accept:

  • Forgetting

  • Not knowing the rules

  • Being too busy

  • Accountant failures (in most cases)

  • Cash flow issues

In my opinion appeals succeed only when evidence is strong and reasons are genuine.

What if your VAT return is late but you owe no VAT?

You will still receive penalty points for submitting late.
However you will not receive a late payment penalty because no VAT is outstanding.

Important

If the return is a repayment return, the same rules apply.

What if your VAT payment is late but the return is on time?

You will not get penalty points but you will get:

  • A late payment penalty

  • Interest

The two systems operate independently.

Examples to make the rules clearer

Example 1: Quarterly filer with repeated lateness

Robert files VAT returns quarterly.

Return 1: late → 1 point
Return 2: late → 2 points
Return 3: late → 3 points
Return 4: late → 4 points → £200 penalty
Return 5: late → £200 penalty
Return 6: late → £200 penalty

Robert must now file 12 months of returns on time and clear past returns to reset to zero.

Example 2: Late payment within 30 days

VAT due: £10,000
Paid 28 days late

Penalty:

  • 2 percent of £10,000 = £200

  • Additional 2 percent on day 30 not triggered

  • Total penalty: £200

  • Plus interest based on BoE rate + 2.5 percent

Example 3: Very late payment

VAT due: £15,000
Paid 70 days late

Penalties:

  • 2 percent at day 15 = £300

  • 2 percent at day 30 = £300

  • Daily penalty for 40 days at 4 percent annual rate
    Daily rate = 0.01096 percent
    40 days × 0.01096 percent × £15,000 ≈ £66

Total penalty: £666
Plus interest.

Example 4: Late return but no VAT due

A business files a nil VAT return late.

Penalty points: yes
Financial penalty: only when threshold reached
Late payment penalty: no
Interest: no

How to avoid VAT penalties going forward

In my experience the best ways to stay compliant are:

1. Use accounting software with VAT reminders

Software linked to MTD reduces the risk of forgetting deadlines.

2. File your VAT return early

You can submit the return early even if you pay on the deadline.

3. Set up a calendar reminder

Use multiple reminders for return submission and payment.

4. Automate VAT payments

A Direct Debit ensures payment is always taken on time.

5. Keep bookkeeping up to date

Poor records often cause delays.

6. Communicate with your accountant early

Give them enough time to prepare your return.

7. Submit estimated returns if needed

If you cannot finalise figures, submit an estimate and amend later. This avoids penalty points.

In my opinion preparation and automation are the best ways to avoid VAT penalty problems.

What happens if you cannot pay your VAT on time?

If you cannot pay on time:

  • Submit the VAT return on time anyway

  • Contact HMRC to set up a Time to Pay arrangement

  • Interest will still apply but penalties may be reduced

  • You avoid receiving penalty points

Submitting the return even when you cannot pay reduces the damage significantly.

What businesses are most at risk of VAT penalties?

From what I have seen, the most at risk are:

  • Small businesses with irregular cash flow

  • Businesses with poor bookkeeping

  • Businesses using spreadsheets instead of software

  • Start ups unfamiliar with VAT

  • Seasonal businesses

  • Rapidly growing businesses

  • Those who frequently change accountants

These businesses often struggle to keep up with deadlines without a reminder system.

In my opinion: the key things you need to know

If I summarised the most important points, they would be:

  1. Late VAT returns now trigger penalty points, not immediate surcharges.

  2. Four late quarterly returns result in a £200 penalty.

  3. Every late return after that triggers another £200 penalty.

  4. Late payment penalties apply separately.

  5. Interest is charged from the due date regardless of penalties.

  6. Points reset only when you file on time for a full compliance period.

  7. Filing on time even when you cannot pay avoids penalty points.

  8. Good systems and reminders prevent most VAT penalties.

In my opinion it is crucial for every VAT registered business to understand these rules to avoid unnecessary cost and stress.

Final thoughts

VAT penalties for late returns can become expensive quickly under the points based system. A single late return is not usually catastrophic, but repeated lateness builds points that lead to £200 penalties and further charges. Late payment penalties and interest also apply separately, increasing the overall cost. The best way to avoid penalties is to file returns on time, maintain good records and set up systems that prevent missed deadlines. If you do fall behind, act quickly to submit outstanding returns and start your compliance period so points can reset.

In my opinion understanding the penalty system and putting simple processes in place makes VAT compliance far less stressful.