VAT Penalties and Interest Explained: Late Returns and Late Payments (2026)

Tax year: 2026/27 | Last reviewed: 2 October 2026

HMRC replaced the old VAT default surcharge in January 2023 with a two-part system: points for late returns and penalties plus interest for late payments. The late payment penalties were increased from 1 April 2025, so paying late now costs much more than it used to.

Late submission: the points system

Each VAT return filed late earns one penalty point. Once you reach the threshold for your filing frequency, you get a £200 penalty, and a further £200 for every late return while you remain at the threshold.

Points below the threshold expire after 24 months. Once at the threshold, they only reset after you file on time for the period of compliance shown and have no outstanding returns for the previous 24 months. Nil and repayment returns count too.

Late payment penalties

From 1 April 2025, if VAT is paid late:

• Up to 15 days late: no penalty if paid in full or a Time to Pay arrangement is agreed.
• 16 to 30 days late: 3% of the VAT outstanding at day 15.
• 31 days or more: 3% of the amount outstanding at day 15, plus 3% of the amount outstanding at day 30, plus a daily penalty at 10% a year on the balance until paid.

Late payment interest

Interest runs from the day after the due date until payment, at Bank of England base rate plus 4%. The percentage can change during a delay. Check HMRC’s current VAT interest guidance rather than treating a rate quoted in an older graphic as fixed.

Example: £10,000 of VAT is paid 60 days late. Penalties are £300 at day 15, another £300 at day 30, and about £82 of daily penalty for the next 30 days, plus roughly £127 of interest. That is around £810 for a two-month delay.

Repayment interest

If HMRC owes you VAT and is late repaying it, it pays repayment interest at base rate minus 1%, subject to HMRC’s applicable rate for the period. Check the current guidance before estimating a repayment.

How to avoid VAT penalties

• Know your deadline: one month and seven days after the period end for most businesses.
• Pay by Direct Debit: HMRC collects three working days after the deadline, provided the mandate is valid, set up in time and the collection succeeds. Check funds and the actual collection date.
• Use Time to Pay early: if you cannot pay, contact HMRC before day 15. An agreed plan stops further penalties, although interest still applies.
• Keep digital records current: MTD for VAT means returns come straight from software such as Xero. See our MTD for VAT service.
• Consider the right scheme: cash accounting means you only pay VAT once customers have paid you.

Appeals and reasonable excuse

You can appeal a penalty within 30 days if you had a reasonable excuse, such as serious illness, an unexpected bereavement or a failure in HMRC’s systems. Lack of money or relying on someone else is rarely accepted.

The same system is coming to Income Tax

Making Tax Digital for Income Tax has its own penalty rules. HMRC will not apply late quarterly-update penalty points for 2026/27, although updates must still be submitted and late tax-return penalties remain relevant. Do not assume VAT and Income Tax operate identically. See our MTD for Income Tax checklist.

FAQs

What is the VAT late payment penalty?

3% at day 15, a further 3% at day 30, then 10% a year on the outstanding balance, plus late payment interest.

Do I get a penalty for one late VAT return?

No financial penalty, just a point, until you reach the threshold for your filing frequency.

What is the VAT registration threshold?

£90,000. See the VAT threshold explained.

Talk it through with Digivolve

We file VAT returns for clients through MTD software well ahead of each deadline, and talk to HMRC for you if cash is tight.

Book a consultation or contact our Haywards Heath team.

This article is general information based on the rules for the 2026/27 tax year as at October 2026. It is not personal tax advice. Rates and thresholds can change, so please speak to us before acting.