Changes to VAT Late Payment Penalties

A significant increase to VAT late payment penalties has been made from 1 April 2025, aimed at encouraging more timely payments.

Penalty Structure

The penalty regime for late payment is based upon the amount of VAT underpaid.

The VAT late payment penalty system imposes penalties after 15 days and 30 days.  Previously these were calculated as 2% of the outstanding VAT at each date, but the recent change has increased these penalties to 3%.

Whilst these increases are unwelcome, a much more significant change has been made to the penalty applying from day 31 onwards.  Again this is calculated using a percentage of the outstanding VAT.  Previously the rate of penalty was 4%, but this has now been increased to 10%.

Although these penalties are calculated using a percentage basis, the charges are separate from late payment interest which is also imposed.  Late payment interest has been increased by 1.5% from April 2025, making the rate currently 8.5%, and this is also added to the amount outstanding.

This means that after 31 days any unpaid VAT will be incurring interest and penalties at a rate totalling 18.5% per annum, calculated daily.

For example, if a company owes £10,000 of VAT, it will incur a penalty of £300 on day 15 and a further £300 penalty on day 30, then just over £5 per day thereafter in late payment interest and penalties.  Paying £10,000 of VAT a year late would incur penalties and interest totalling almost £2,400.

Agreeing a “time to pay” arrangement with HMRC before VAT becomes overdue will avoid late payment penalties and so is likely to be very important when cashflow causes payment delays.  This highlights the need for businesses to be proactive in managing their VAT obligations to avoid substantial additional costs.

The repayment rules are also much less generous than the former repayment supplement system

which provided for a credit equal to 5% of the repayment where it was delayed by more than 30

days.  The present system only provides for an interest credit where HMRC are late refunding VAT, currently calculated at just 3.5% per annum.

HMRC Guidance

The Revenue have published guidance on the penalty system at:

https://www.gov.uk/government/collections/vat-penalties-and-interest

This guidance has not yet been updated for the increased rates, which are described here:

https://www.gov.uk/government/publications/increasing-vat-and-other-taxes-late-payment-penalties-percentage-rate-relating-to-penalty-reform

If you wish to know more on VAT late payment penalties, please get in touch with Alan Rolfe on 023 8046 1235, or email Alan Rolfe.