HMRC increases VAT penalties for late payments

Each VAT return is treated individually. If payment is made within 15 days of the deadline no penalty is charged. However, anything beyond that is now more costly than before.

The first stage of the penalty system is triggered when payment is more than 15 days late. At that point a 3% penalty applies – up from the previous 2%. If the payment is more than 30 days late a second 3% charge is added making it a total of 6% rather than the previous 4%.

Beyond 30 days a daily penalty is added at an annualised rate of 10%. This is a sharp rise from the previous rate of 4% and means longer delays now lead to much steeper costs.

Alongside this HMRC has also raised the late payment interest rate. From 6 April 2025 interest will be charged at 8.5% – made up of a 4.5% base rate plus a 1.5% surcharge and the existing margin. Interest runs from the due date to the date VAT is actually paid even if no penalty has been triggered.

“VAT late payment costs can now escalate very quickly” says Phoebe Hall, Head of Outsourcing. “A missed deadline followed by inaction could leave businesses with a significant bill before they even realise the situation. The changes make it more important than ever to act early.”

One way to stop further penalties is by setting up a time to pay arrangement. This prevents new penalties from being applied going forward but does not cancel out any already incurred and will not stop interest from continuing to accrue.

It is also worth noting that businesses using the annual or cash accounting schemes are not eligible to arrange a time to pay. In these cases it may be better to pay what is affordable by the due date to reduce the amount that becomes late. This can limit both penalties and interest.

VAT arrears are now more expensive than ever to ignore. Proactive communication with HMRC and even a part payment before the deadline can make a significant difference.

Details about setting up a payment plan can be found here.