What are the penalties for submitting a late VAT return?

As a chartered accountant running my own firm, I deal with late VAT returns more often than people might expect. Sometimes it is a genuine oversight, sometimes cash flow pressure causes delay, and sometimes businesses simply misunderstand the rules. Whatever the reason, HMRC take late VAT returns seriously, and the penalties are now stricter, more structured, and far less forgiving than they used to be.

Since the introduction of the new VAT penalty system, many business owners are unclear about what actually happens if a VAT return is late, how penalties build up over time, and when interest applies. In this article, I want to explain clearly and practically what the penalties are for submitting a late VAT return, how the points based system works, how late payment penalties are calculated, and what you can do to reduce or avoid penalties altogether.

This is written exactly as I explain it to clients, using UK rules, real world examples, and plain English, not scare tactics.

The most important thing to understand first

The first thing I always clarify is this.

There are two separate issues when it comes to late VAT obligations:

• Submitting a VAT return late

• Paying VAT late

Each has its own penalties and interest rules.

You can submit a VAT return on time but pay late, or submit late but pay on time, and the penalties will be different.

Many people assume it is all treated as one problem. HMRC do not see it that way.

The current VAT penalty system explained simply

HMRC now use a points based penalty system for late VAT returns, combined with separate penalties and interest for late payment.

The system is designed to:

• Encourage consistent compliance

• Penalise repeated lateness rather than one off mistakes

• Escalate penalties for persistent late filers

Understanding how points work is essential.

Late VAT return penalties, the points system

If you submit a VAT return late, HMRC will usually issue you with a penalty point.

The number of points you can accumulate before a financial penalty is charged depends on how often you submit VAT returns.

For most small businesses submitting quarterly VAT returns:

• You receive one penalty point for each late return

• Once you reach four penalty points, a £200 penalty is charged

This £200 penalty applies when the threshold is reached, not for each late return initially.

What happens after you reach the penalty threshold

Once you reach the penalty threshold and receive the £200 penalty, the system becomes stricter.

After that point:

• Every further late VAT return results in an additional £200 penalty

• Penalty points remain on your record

• Compliance becomes critical

This is where late filing can quickly become expensive.

How long penalty points stay on your record

Penalty points do not disappear immediately.

To reset your points back to zero, you must:

• Submit all VAT returns on time for a set compliance period

• Submit any outstanding VAT returns

For quarterly VAT return businesses, the compliance period is typically 12 months of on time submissions.

If you submit late again during this period, the clock resets.

This is why one late return can have consequences for years if behaviour does not improve.

Examples to make this real

Let me give a practical example.

A quarterly VAT registered business submits four VAT returns late over time.

• First late return, one penalty point

• Second late return, two penalty points

• Third late return, three penalty points

• Fourth late return, four penalty points, £200 penalty charged

If they then submit the next return late:

• Another £200 penalty is charged immediately

This is why repeated lateness becomes very costly.

What if it is your first late VAT return

Many clients ask whether there is a warning.

Under the current system, HMRC do not issue warnings in the way they used to. A first late return still results in a penalty point, but no financial penalty is charged until the threshold is reached.

That said, HMRC expect businesses to understand and comply with deadlines. Relying on goodwill is risky.

Late VAT payment penalties explained

Late payment penalties are completely separate from late submission penalties.

If you submit your VAT return on time but pay late, you can still be penalised.

HMRC operate a two stage late payment penalty system.

First late payment penalty

If VAT remains unpaid:

• 15 days after the payment deadline, a penalty of 2 percent of the VAT outstanding is charged

• 30 days after the payment deadline, a further 2 percent penalty is charged

This means that by day 30, you may face a total penalty of 4 percent of the VAT owed.

These penalties apply automatically.

Second late payment penalty

If VAT remains unpaid after 30 days, HMRC also charge an ongoing penalty.

This is calculated as:

• 4 percent per year on the outstanding VAT

• Charged daily until the VAT is paid in full

This is in addition to interest.

Interest on late paid VAT

Interest is charged separately from penalties.

HMRC charge interest from the day after the VAT payment deadline until the VAT is paid in full.

Interest applies even if:

• You have submitted the VAT return on time

• You are appealing penalties

• You are in discussions with HMRC

Interest cannot usually be appealed. It is statutory.

Submitting a VAT return late but paying on time

This situation is more common than you might think.

If you submit your VAT return late but pay the VAT by the deadline:

• You will receive a penalty point

• You will not face late payment penalties

• Interest does not apply

While this avoids cash penalties, the penalty point still moves you closer to the £200 charge.

Paying VAT late but submitting on time

If you submit on time but pay late:

• No penalty point is added

• Late payment penalties may apply

• Interest will apply

This distinction matters when prioritising actions.

If you can only do one thing before the deadline, submitting the return is usually the better option.

What counts as a late VAT return

A VAT return is late if it is submitted after the deadline.

For most businesses, the deadline is:

• One month and seven days after the end of the VAT period

Submitting even one day late counts as late.

There is no grace period.

Making Tax Digital does not change deadlines

Many businesses assume Making Tax Digital changes deadlines or provides leeway.

It does not.

You must still:

• Submit VAT returns on time

• Use compatible software

• Maintain digital records

Technical issues with software are rarely accepted as excuses.

Reasonable excuse and appeals

You can appeal VAT penalties if you believe you have a reasonable excuse.

HMRC accept reasonable excuse in limited circumstances.

Examples that may be accepted include:

• Serious illness

• Bereavement

• Fire or flood

• Unexpected system failure beyond your control

Examples that are not usually accepted include:

• Being too busy

• Cash flow problems

• Forgetting the deadline

• Reliance on someone else

Appeals must be made promptly and supported by evidence.

Late VAT returns and estimated assessments

If you fail to submit a VAT return, HMRC can issue an estimated assessment.

This is HMRC estimating how much VAT you owe.

These estimates are often higher than reality.

The only way to remove an estimated assessment is to submit the missing VAT return.

Ignoring it only makes things worse.

What happens if VAT returns are repeatedly late

Repeated late VAT returns can lead to more than just penalties.

HMRC may:

• Increase scrutiny of your business

• Open compliance checks

• Remove you from certain VAT schemes

• Refuse time to pay arrangements

• Escalate enforcement action

Late compliance signals risk to HMRC.

Time to Pay arrangements and penalties

If you cannot pay your VAT on time, contacting HMRC early matters.

If you arrange a Time to Pay agreement within:

• 15 days of the payment deadline

You can usually avoid the first late payment penalty.

If you arrange it within:

• 30 days of the deadline

You can usually avoid the second penalty.

Interest still applies, but penalties can often be reduced or avoided.

What to do if you know a VAT return will be late

If you know you will miss the deadline, the worst thing you can do is ignore it.

In practice, I advise:

• Submit the VAT return as soon as possible

• Pay what you can, even if not the full amount

• Contact HMRC promptly

• Keep records of all communication

Early action reduces penalties and demonstrates good faith.

Common reasons businesses submit VAT returns late

From my experience, the most common causes are:

• Poor bookkeeping

• Missing invoices

• Cash flow pressure

• Reliance on one person

• Lack of reminders

• Misunderstanding deadlines

Most of these are preventable with better systems.

How to avoid late VAT return penalties

Avoidance is far easier than appeal.

Practical steps include:

• Setting calendar reminders

• Using accounting software properly

• Reconciling VAT monthly rather than quarterly

• Keeping bookkeeping up to date

• Reviewing VAT returns early

• Delegating responsibility clearly

These simple controls make a huge difference.

What accountants actually do in this situation

When a client comes to me with late VAT returns, the first priorities are always:

• Get all outstanding VAT returns submitted

• Quantify the VAT owed

• Assess penalties and interest

• Explore Time to Pay options

• Appeal where appropriate

• Put systems in place to prevent repeat issues

HMRC respond far better to organised, proactive action than to silence.

How far back HMRC can charge penalties

HMRC can charge penalties going back several years.

Penalty points remain active until compliance improves.

Late payment penalties and interest apply regardless of how old the VAT period is.

This is why unresolved VAT issues do not go away on their own.

Directors’ responsibilities and VAT penalties

For limited companies, VAT penalties are charged to the company, not the director personally.

However, directors are responsible for ensuring compliance.

Persistent VAT failures can lead to:

• Increased HMRC scrutiny

• Director conduct reviews

• Disqualification risks in extreme cases

VAT compliance is a governance issue, not just an admin task.

Final thoughts from real world experience

Late VAT returns are one of the easiest ways to attract unnecessary HMRC attention. The penalties are no longer symbolic, and repeated lateness is now actively punished through the points system.

In my experience, most late VAT issues are not caused by bad intent. They are caused by delay, disorganisation, or misunderstanding. Unfortunately, HMRC penalties do not distinguish between stress and strategy.

Submitting the VAT return on time is just as important as paying the VAT. If you are struggling, act early, communicate clearly, and get advice before penalties start to stack up.

With the right systems in place, VAT deadlines become routine rather than something to fear, and penalties become something you rarely, if ever, see.