Penalties for Submitting Your VAT Return Late

Introduction

If you submit your VAT Return after the deadline, HMRC will apply penalty points to your account. Once you reach a certain number of points, you'll face a £200 penalty for that late submission and another £200 for each return you submit late whilst at the threshold. Understanding how the points system works — and how to remove points — can help you avoid these financial penalties.

How the penalty points system works

For VAT accounting periods starting on or after 1 January 2023, HMRC uses a points-based system to penalise late VAT Return submissions. This applies to all returns, including nil returns and repayment returns (where you're claiming VAT back from HMRC).

Each time you submit a VAT Return late, you receive one penalty point. These points accumulate until you reach your penalty point threshold — the maximum number of points allowed for your accounting period.

Once you reach the threshold, you'll receive a £200 penalty. You'll also receive another £200 penalty for each subsequent return you submit late while you remain at the threshold.

The penalty point threshold

Your penalty point threshold depends on how often you submit VAT Returns:

• Annual returns: 2 points
• Quarterly returns: 4 points
• Monthly returns: 5 points

How it works in practice

Here's an example for a business submitting quarterly returns:

A company with a threshold of 4 points has already received 3 penalty points for three late submissions. They then submit their next return late, receiving their fourth penalty point. Because they've now reached the threshold, they receive a £200 penalty.

If they submit their next return on time, they stay at 4 penalty points but don't receive a penalty. However, if they submit their next return late, they'll receive another £200 penalty because they're still at the threshold.

Non-standard accounting periods

If you have HMRC's agreement to use non-standard accounting periods, different thresholds apply based on the length of your period:

• Over 20 weeks: 2 points (annual rules apply)
• Over 8 weeks but no more than 20 weeks: 4 points (quarterly rules apply)
• 8 weeks or less: 5 points (monthly rules apply)

What happens when your business changes

Changing your accounting period

If you change how often you submit VAT Returns (for example, from quarterly to monthly), HMRC will adjust both your threshold and any existing penalty points.

When you move to more frequent submissions, points are added:

• Annual to quarterly: +2 points
• Annual to monthly: +3 points
• Quarterly to monthly: +1 point

When you move to less frequent submissions, points are deducted:

• Quarterly to annual: -2 points
• Monthly to annual: -3 points
• Monthly to quarterly: -1 point

If the adjustment would give you a minus figure, your penalty points are set to zero. You cannot appeal these adjustments.

Taking over a business

If you take over a VAT-registered business as a "going concern" (essentially purchasing it as an operational business), any penalty points from the previous owner will not transfer to your VAT registration number — even if the same VAT registration number continues to be used.

VAT groups

If your business is part of a VAT group and the representative member changes, any penalty points transfer to the new representative member. However, if a member joins or leaves the group, the group's total penalty points remain unchanged.

Returns not affected by the penalty system

The late submission penalty rules do not apply to:

• Your first VAT Return after newly registering for VAT
• Your final VAT Return after cancelling your VAT registration
• One-off returns covering periods other than a standard month, quarter or year (for example, a four-month return when changing from quarterly to annual submissions)

How to remove penalty points

There are two ways penalty points can be removed: automatic expiry or meeting compliance conditions.

Automatic expiry (if you haven't reached the threshold)

If you haven't reached your penalty point threshold, individual points will expire automatically. The expiry date depends on when your return was originally due:

• If the deadline was not the last day of a month: the point expires on the last day of the month, 24 months after the deadline
• If the deadline was the last day of a month: the point expires on the last day of the month, 25 months after the deadline

Removing all points by meeting compliance conditions

If you've reached the threshold (or want to remove points faster than waiting for automatic expiry), you must meet both of these conditions:

Condition A: Complete a period of compliance by submitting all returns on time for:

• Annual returns: 24 months (2 returns)
• Quarterly returns: 12 months (4 returns)
• Monthly returns: 6 months (6 returns)

Condition B: Submit all outstanding returns from the previous 24 months.

Your period of compliance starts on the first day of the month following your last missed deadline. For example, if you missed a deadline on 7 July, your period of compliance would start on 1 August. If you missed a deadline on 31 March (the last day of the month), your period would start on 1 May.

Once you meet both conditions, all your penalty points are reset to zero.

Appealing a penalty point or financial penalty

When you receive a penalty point or £200 penalty, HMRC will send you a penalty decision letter explaining your right to a review.

You can check your penalty points and appeal through your VAT online account. If you can't use your online account, you can write to:

Solicitor's Office and Legal Services

HMRC

BX9 1ZT

Your penalty may be cancelled if you have a reasonable excuse for submitting your return late. You can choose either a review by HMRC or an appeal to the tax tribunal.

Sources

• Penalty points and penalties if you submit your VAT Return late
• Remove penalty points you've received after submitting your VAT Return late

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