Quick answer
Since 1 January 2023, HMRC runs two separate penalty regimes for VAT: one for late submissions (a points system, with a £200 fine once you hit your threshold) and one for late payments (percentage charges that escalate at 15 and 30 days, plus daily interest). The two are independent, work on different rules, and trigger different consequences. The single most common mistake is treating them as one regime, and the next is misreading when the clock starts.
Common mistakes & confusions
  • Submission and payment are two different things. A business can file on time but pay late, or pay on time but file late. Each path triggers a different regime with different consequences, and treating them as one is where many businesses end up paying twice for the same delay.
  • The 15-day "grace period" isn't free. No late payment penalty applies in the first 15 days, which is sometimes read as "no cost". Interest is accruing throughout, and what feels like a safe buffer can quietly become a real bill, particularly at current Bank of England base rates.
  • Resetting penalty points isn't as simple as the summary suggests. There are two conditions to satisfy, the period of compliance depends on your filing frequency, and the rules about which past returns count can be read in more than one way. Many businesses think they've reset their points when they haven't.
  • Changing filing frequency changes the threshold. Moving from quarterly to monthly (or vice versa) doesn't reset your points, but HMRC may adjust them, and the new threshold may be much closer than you expect. The mechanics aren't intuitive.
  • "Reasonable excuse" exists but isn't a free pass. The law allows penalties to be cancelled if you had a reasonable excuse for the failure, but what HMRC accepts in practice and what taxpayers think should qualify often diverge. The bar is higher than most expect.
  • Time to Pay arrangements can prevent penalties, but only if requested in time. Done at the right moment, they suspend further penalty accrual. Done at the wrong moment, they don't. The timing detail is where this often goes wrong.

What changed, and when

The old "default surcharge" system was replaced on 1 January 2023 by two new regimes that work entirely separately:

Both apply to every VAT return for accounting periods starting on or after 1 January 2023. The late payment rates were then increased on 1 April 2025 and remain at those levels in 2026, making the cost of falling behind materially higher than under the old regime.

Late submission: the points system

Every time you submit a VAT return after the deadline, you get one penalty point. Points accumulate until you reach a threshold, at which point HMRC charges a £200 fine. Every subsequent late submission triggers another £200 fine, until you reset.

Your threshold depends on how often you file:

Submitting a nil return late still counts as a late submission and still earns a point, which catches many businesses out. Filing on time but paying late doesn't earn submission points (it triggers the separate late payment regime, see below).

Watch out
If you know your payment will be late but you can still file the return, file it. Late submission and late payment are penalised separately, and there's no reason to take both hits when you can avoid one of them.

Which late submissions don't earn a point

HMRC doesn't issue a point if the late return is:

How points expire and reset

If you haven't reached the threshold, individual points expire automatically two years after the month following the missed submission. If you have reached the threshold, the points freeze and don't expire automatically. To reset them to zero, you need to satisfy both of two conditions:

  1. Condition A: a period of compliance, where every return is submitted on time. The length depends on your filing frequency: 12 months for quarterly filers, 6 months for monthly filers, 24 months for annual filers.
  2. Condition B: all VAT returns from the previous 24 months have been submitted (even if they were submitted late).

Where this gets ambiguous: the reset conditions look mechanical, but in practice they involve more than one calendar to track, and the start dates aren't always where businesses think they are. Many discover their "reset" wasn't actually complete only when HMRC issues another £200 penalty.

Late payment: the percentage system

Late payment penalties are completely separate from points. They apply when you don't pay your VAT bill by the deadline, regardless of whether you filed your return on time.

The structure has been progressive since the 2025 update:

On top of all that, HMRC charges late payment interest from the original due date until you pay, at a rate of Bank of England base rate + 4 percentage points. Interest and penalties run in parallel, not instead of each other.

Where this gets expensive quickly: the combination of two stepped penalties, daily-accruing interest at base rate plus four points, and a second penalty running from day 31 means the real cost of a 60 or 90-day delay can be much higher than people estimate when they decide to "deal with it next week". The exact figure depends on the size of the bill, the timing, and the current base rate.

Need a hand?

HMRC Response Support is our dedicated service for businesses dealing with VAT penalties, late notices, or assessments. We handle the full correspondence with HMRC on your behalf, from the initial response to the resolution.

Time to Pay: the lever most businesses don't use early enough

If you know you can't pay on time, you can ask HMRC for a Time to Pay arrangement: a formal agreement that lets you settle the VAT in instalments. Crucially, if the arrangement is in place before certain penalty trigger dates, it can prevent further penalties from accruing for as long as you stick to the schedule.

The catch is in the timing. Approaching HMRC on day 5 with a credible proposal is very different from approaching them on day 35 with a payment plan and a stack of accrued penalties. The earlier you act, the more options you have, and the less it costs.

The expensive mistake we see: a business waits until they receive a penalty notice before contacting HMRC, by which point two or three penalties have already triggered and interest has been running for weeks. A Time to Pay request made before the deadline often costs nothing in penalties at all.

Reasonable excuse: when penalties can be cancelled

The law allows HMRC to cancel a penalty if you had a reasonable excuse for the failure. The concept exists, businesses do successfully appeal, and it's worth knowing about.

What HMRC will typically consider reasonable: serious illness, a death in the immediate family, a major HMRC system outage at the time of the deadline, certain types of postal disruption, and similar genuinely exceptional events. What HMRC will typically not consider reasonable: not having the money to pay, relying on an agent or accountant who let you down, forgetting the deadline, or being too busy.

The line between these two lists is exactly where most disputed appeals sit, and it's heavily fact-specific. The same circumstances can succeed at appeal for one business and fail for another, depending on the documentation, the timing, and how the case is presented.

Need a hand?

Got a penalty notice or a letter from HMRC? Start with a free call. We'll review what you've received, tell you straight where you stand, and explain how we can take the HMRC correspondence off your plate from there.

Changing filing frequency: what happens to your points

If you change from quarterly to monthly filing (or any other change in frequency), HMRC will adjust your existing penalty points proportionally. The exact adjustment depends on your current points balance and the move you're making. Points don't reset, and the new threshold may be much closer than your old one.

This catches businesses that move to monthly filing to accelerate VAT refunds: they end up much closer to the new five-point threshold than they realised, and a single late return can suddenly trigger the £200 fine they thought they were comfortably clear of.

Appeals: process and reality

You can appeal both penalty points and late payment penalties. The process has a defined structure: an internal HMRC review first, then a tribunal appeal if you remain dissatisfied. Strict time limits apply (typically 30 days from the penalty notice).

Whether to appeal is rarely an obvious call. Some penalties are clearly worth appealing, others are clearly not, and a large category in the middle depends on factors like the strength of your reasonable excuse, the cost of the penalty versus the time to appeal, and the impact on your wider HMRC relationship. This is exactly the territory where a 30-minute specialist conversation pays off, before you commit time to a case that won't succeed.

What you need to do, step by step

  1. Treat submission and payment as two separate problems. File on time always, even if you can't pay, and treat the payment deadline as a hard date.
  2. Track your penalty points balance. You can check it in your HMRC online account. Knowing where you sit relative to your threshold makes everything else easier.
  3. If you know payment will be late, contact HMRC before the deadline to request a Time to Pay arrangement. The earlier, the better.
  4. If you receive a penalty notice, read it carefully and act within the appeal deadline. The 30-day clock starts on the notice date, not when you opened the envelope.
  5. Keep documentation of anything that could become a reasonable excuse, including correspondence, medical certificates, system error screenshots. These are essential if you later need to appeal.
  6. Once you've hit a threshold, map out the conditions to reset your points and treat the reset as a deliberate project, not something that happens automatically.

The situations that most often turn into costly mistakes

Penalty letters tend to arrive at busy moments, with short deadlines, and they don't always say everything you'd want to know. In practice, the situations below are where small delays or missteps most often turn into stacked penalties, interest, and prolonged HMRC correspondence:

Whether you're a business owner or an accountant working on a client case, we focus on the VAT questions where extra expertise pays off, and we work in plain English.

General information, not personal advice. UK VAT rules are detailed and the right answer for your business depends on your specific circumstances. For decisions with real financial impact, get them checked by a specialist.