Penalties for late VAT payments

More than 580,000 traders were penalised for late payment of VAT last year, representing a quarter of businesses registered for VAT. A sure sign that the tougher penalty regime introduced in 2023 is hitting cash-strapped businesses.
Penalty regime

Each late payment of VAT is considered separately, with penalties charged as follows:

Days late
Penalty

Up to 15
None

16 to 30
3% of outstanding VAT

More than 30
A further 3% penalty, plus a daily penalty at a rate of 10% p.a. on the outstanding VAT (charged beginning after the initial 30-day period)

• A penalty is not charged if a trader has a reasonable excuse. Illness and domestic problems do not count as valid excuses unless really serious. Lack of funds also does not count, nor does reliance on a third party or a lack of a reminder from HMRC.
• A trader can, however, avoid any further penalties accruing by entering into a time to pay (TTP) arrangement with HMRC. For example, penalties are avoided if a business secures an arrangement before a VAT payment is 15 days late.

 
Traders struggling to pay a VAT liability should avoid ignoring the overdue bill. Instead, try to negotiate a TTP arrangement to provide a breathing space.
Regardless of whether any late payment penalties are incurred, late payment interest is charged from the due date until the date that a VAT liability is paid. The rate charged is currently set at 7.75%.

Penalty increases in 2027
From April 2027, the 3% late payment penalty charged after day 15 will increase to 4%, as will the penalty charged after day 30.

Currently, if a business is, say, 50 days late paying a VAT liability of £50,000, the total penalties charged amount to £3,273. The total will increase to £4,273 from April 2027; a stark warning that businesses need to get on top of their cash flow management.
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HMRC’s guidance on how late payment penalties work can be found in the guidance.