Penalties for Paying VAT Late

If you pay your VAT late, HMRC will charge you penalties and interest. The penalty system changed in January 2023, introducing a two-stage approach: the longer you leave it, the more you pay. Understanding how these penalties work—and knowing that setting up a payment plan can...

# Penalties for Paying VAT Late

When late payment penalties apply

Late payment penalties apply to VAT accounting periods that start on or after 1 January 2023. If your VAT period started on or before 31 December 2022, the old default surcharge system applies instead.

The penalties apply to most VAT payments not paid in full by the deadline, including:

Payment due on your VAT return
Payment following an amendment to a return or correction
Payment from a VAT assessment issued by HMRC when you didn't submit your return
Payment from a VAT assessment issued for another reason

The penalties do not apply to VAT payments on account or instalments under the VAT Annual Accounting Scheme.

How the penalty system works

The penalty system operates in stages based on how many days late your payment is:

Payment up to 15 days overdue

No penalties are charged during this period. You'll receive a late payment reminder letter from HMRC asking you to pay in full to avoid penalties. However, late payment interest will apply from the first day your payment is overdue.

Payment between 16 and 30 days overdue

You'll receive your first late payment penalty of 3% calculated on the VAT you owed at day 15.

For example, if you owed £15,000 at day 15, your first penalty would be £450 (3% of £15,000).

Payment 31 days or more overdue

Your first late payment penalty increases, and a second late payment penalty begins.

The first penalty is now calculated at:

3% of what was outstanding at day 15, plus
3% of what is still outstanding at day 30

The second penalty is a daily charge calculated at an annual rate of 10% on the outstanding balance. This applies every day from day 31 until either:

You pay the outstanding balance in full, or
Just before the end of the 2-year assessment time limit (if tax remains outstanding)

Worked example: paying 51 days late

A company submits their June 2025 VAT return on time but doesn't pay the £15,000 they owe until 51 days after the deadline.

First late payment penalty: £900

3% of £15,000 outstanding at day 15 = £450
3% of £15,000 outstanding at day 30 = £450

Second late payment penalty: £86.30

Daily charge from day 31 to day 51 (21 days)
Calculated as: £15,000 × 10% × 21 ÷ 365 = £86.30

Total penalty: £986.30 (plus interest on the original £15,000 VAT owed)

Late payment interest

From the first day your payment is overdue until you pay in full, HMRC charges late payment interest on the outstanding amount. This applies separately to the penalties themselves if you don't pay them on time.

How to avoid or reduce penalties

Pay in full as soon as possible

The most straightforward way to avoid penalties is to pay your VAT bill in full:

By day 15: no penalties charged
Between days 16-30: only the first penalty (3%) applies
From day 31 onwards: both penalties apply and the second penalty increases daily

Set up a Time to Pay arrangement

If you cannot pay your VAT on time, contact HMRC as soon as possible to request a payment plan, known as a Time to Pay arrangement. This is flexible and adapted to your specific financial circumstances.

Crucially, if HMRC agrees to a Time to Pay arrangement, it can mean lower or no late payment penalties. The arrangement can cover all outstanding amounts due, including penalties and interest already charged.

To request a payment plan, contact the Payment Support Service to discuss your finances and what you can afford to pay each month.

Important warning: If you don't keep to the conditions of your Time to Pay arrangement, it may be cancelled. If this happens, HMRC will charge both first and second late payment penalties as if the arrangement never existed.

How to appeal a penalty

If you receive a late payment penalty, HMRC will send you a penalty decision letter offering you a review.

You can appeal if you have a reasonable excuse for paying late. You have two options:

Ask HMRC to review their decision
Appeal directly to the tax tribunal

You can check penalty details and ask for a review through your VAT online account. If you cannot use your online account, write to:

Solicitor's Office and Legal Services

HMRC

BX9 1ZT

(You don't need to include a street name, city name or PO box with this address.)

Key actions to take

If you realise you'll struggle to pay your VAT on time:

1. Contact HMRC immediately – the earlier you act, the more options you have

2. Request a Time to Pay arrangement – this can significantly reduce or eliminate penalties

3. Pay as much as you can, as soon as you can – even partial payment will reduce the amount on which penalties are calculated

4. Keep to any payment plan you agree – breaking the terms means penalties apply retrospectively

Remember that setting up a payment plan before day 16 can help you avoid the first penalty entirely, while arranging one before day 31 can prevent the daily second penalty from applying.

Sources

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.