Late VAT Payments: Surcharges, Penalties and Fines: Advice for limited company directors

What are the penalties for paying VAT late?Late VAT payments can have significant consequences for businesses and individuals alike. When VAT payments are not made on time, authorities often impose surcharges as penalties.

These surcharges are additional amounts levied on top of the original VAT liability, and they can quickly accumulate, exacerbating financial strain.

The severity of surcharges typically depends on the extent of the delay, with longer delays in payment resulting in higher penalties.

Moreover, late VAT payments can damage a business’s reputation and lead to a loss of trust from customers and suppliers.

It is crucial for businesses to adhere to VAT payment deadlines to avoid unnecessary financial burdens and maintain a positive financial standing

What are the penalties for paying VAT late?

Paying VAT late can result in significant penalties and surcharges. HMRC imposes these penalties to encourage businesses and individuals to comply with VAT payment deadlines.

The penalties for late VAT payments are calculated as a percentage of the outstanding amount and increase based on the duration of the delay.

For instance, if VAT is paid one to 30 days late, a standard percentage of the outstanding VAT is charged as a penalty. If the delay extends beyond 30 days, additional penalties are applied.

These surcharges can quickly accumulate and put a strain on a business’s finances. Moreover, persistent late payments can lead to further investigations by HMRC, potentially resulting in more severe consequences.

It is crucial for businesses to pay their VAT on time to avoid these costly penalties and maintain a positive financial standing.

What happens when you miss a VAT deadline?

As of 1 January 2023, late submission of your VAT Return to HMRC will trigger the accrual of penalty points under the new scheme.

These points will accumulate until a specified threshold is reached, at which point you will be subject to a £200 fine. Subsequent £200 fines will be issued until you manage to bring your VAT account up to date.

This new approach replaces the previous system where instant fines or Surcharge Liability Notices were issued based on VAT payment history. If you find yourself unable to immediately settle the outstanding amount, there is an option to explore a Time to Pay (TTP) arrangement with HMRC, where you can discuss a feasible plan to clear your dues over a reasonable timeframe.

Being proactive in addressing late VAT submission and considering available options can help mitigate the financial impact and ensure continued compliance with tax regulations.

Read more: What are the VAT Rates

Understanding the late VAT Returns Penalty Points System

It’s essential to be aware that HMRC exercises a certain degree of leniency for first-time late VAT submissions within a 12-month period. In such cases, businesses receive a penalty point, serving as a warning rather than an immediate financial penalty. HMRC understands the importance of not burdening businesses with unnecessary debt and gives them an opportunity to rectify the situation without severe consequences.

Consider this initial penalty point as a reminder to address the outstanding VAT promptly and bring your account up to date. Taking prompt action will prevent further penalty points from being issued and shield you from additional financial penalties. HMRC’s primary goal is to encourage compliance rather than punish businesses, and this initial warning system allows for a grace period to correct the late submission.

Ensuring that you promptly address the late VAT submission will help you maintain a positive financial standing and foster a good working relationship with HMRC.

The Penalty Point Threshold for Late VAT Returns and Payments

The point at which your penalty points transition into £200 fines is contingent on the specifics of your accounting period and the frequency of your required VAT Return submissions.

Accounting Period Penalty Points Threshold
Annually 2
Quarterly 4
Monthly 5

Removing VAT Penalty Points

Penalty points for VAT Returns have a lifespan of 24 or 25 months, depending on the deadline for submission. If the return was due any time before the last day of the month, points will expire at the end of the month, two years following their issuance.

However, if the deadline was the last day of the month, the points will expire on the last day of the next month, 25 months after being assigned.

Nevertheless, if you’ve reached the threshold for penalties, a more proactive approach is required to eliminate these points. You must complete two steps to achieve this:

  1. Submission of all past due VAT Returns for the previous 24 months.
  2. Undertaking a ‘compliance period’ during which you must ensure timely submission of all returns. The duration of this period is 24 months for those who submit annual returns, 12 months for those who submit quarterly, and 6 months for monthly submissions

What can I do to prevent late VAT payments?

Missing or delayed VAT payments are seldom random occurrences; they often indicate a deeper financial issue that needs immediate attention. Prolonged delays in VAT payments could imply serious financial instability that, if unaddressed, could jeopardize the entire company’s viability.

A shortage of funds to settle VAT liabilities usually reflects broader cash flow challenges within the company. Given that VAT is accumulated by a company from its clients on HMRC’s behalf, the requisite funds should theoretically be available when the payment is due.

Often, when a company fails to pay, it’s a sign that these funds have not been properly allocated for their intended purpose, but have instead been diverted to cover other business costs and overheads. Hence, it is crucial to identify and address such missteps promptly to safeguard the company’s financial health.

What are my options if I have fallen behind on paying VAT?

If your company is struggling to meet its VAT commitments and unable to clear the entire owed sum at once, a Time to Pay Arrangement (TTP) could provide a viable solution. A TTP allows a company to pay off its tax arrears through manageable monthly instalments, rather than requiring a single, lump-sum payment.

Typically, these repayment plans span no longer than 12 months. During this period, it’s important to stay current with all ongoing VAT and tax obligations, on top of making the agreed repayments to cover your VAT arrears.

While such an arrangement can provide significant relief and recovery opportunity after a temporary financial setback, it may become challenging to maintain if underlying financial issues persist, as the company needs to manage the ongoing payments required to uphold the arrangement.

Why Professional Guidance Can Help When Paying VAT Late

Late VAT payments may be symptomatic of various difficulties a company could be facing, and unfortunately, HMRC might not always show the level of leniency that one might hope for.

There might be instances when it becomes necessary to clarify the circumstances leading to late submissions or payments, but HMRC tends to accept only a handful of reasons as valid.

In extreme cases such as a fire leading to the complete loss of the company’s records, HMRC might consider this a legitimate reason. However, barring any such catastrophic event, HMRC expects payments to be made on time.

An experienced and licensed insolvency practitioner can often step in to negotiate some breathing space and interact with HMRC on your behalf, providing a valuable buffer during these challenging times.

Alternatives to a Time to Pay

When a HMRC Time to Pay Arrangement isn’t a feasible option due to limited funds or HMRC’s unwillingness to approve the proposed payment plan, consulting a licensed insolvency practitioner can provide you with guidance on the remaining options and help you determine the most suitable course of action.

One potential solution might involve entering into a formal insolvency procedure aimed at reversing the company’s financial difficulties. This could be achieved through a Company Voluntary Arrangement (CVA), a mechanism that enables a company to restructure its existing liabilities and negotiate a mutually beneficial agreement with creditors.

A CVA allows the company to continue operations while managing its debts in a financially feasible way. Importantly, a CVA can incorporate all types of creditors, including HMRC, which means that VAT arrears can be addressed as part of this process.

Another option might involve securing business funding that could aid your ongoing cash flow or provide the crucial financial boost required to steer your company back to a stable path.

Frequently asked questions

What is the penalty for late payment of VAT in 2023?

The penalty for late payment of VAT in 2023 is Payments that are between 16 and 30 days late will trigger a penalty of 2%; (of the amount outstanding at day 15) – although, to help businesses transition to the new regime, HMRC will not apply this rule during 2023 unless payments are more than 30 days late.

What happens if your VAT payment is late?

If your VAT payment is late HMRC will record a 'default' on your account if you are late with your VAT Return or payment. Once you've defaulted, you'll begin a 12 month 'surcharge period'. A surcharge is an extra amount on top of the VAT you owe.


In conclusion, managing VAT payments promptly is critical to maintaining the financial health of a business. Late payments and subsequent surcharges not only pose immediate financial challenges, but they may also indicate deeper cash flow problems that can threaten the long-term viability of a company.

Solutions such as Time to Pay Arrangements and Company Voluntary Arrangements can provide structured means to handle such challenges.

Yet, these necessitate ongoing commitment and potentially professional guidance from a licensed insolvency practitioner. Proactively managing VAT obligations and seeking timely advice when financial difficulties arise can steer a company towards recovery, stability, and sustained growth.

Steve Jones Profile
Insolvency & Restructuring Expert at Business Insolvency Helpline

With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.