HMRC’s VAT penalty system replaced the old default surcharge regime for VAT periods starting on or after 1 January 2023. It’s been in place long enough now that most VAT-registered businesses have encountered it, but the rules have a habit of catching people out — partly because the system genuinely is more complex than what it replaced, and partly because the rates themselves have changed since the system launched.
Here’s exactly how it works, including the updated rates that took effect from April 2025.
The core change: two separate penalties, not one
The old default surcharge system bundled late submission and late payment together into a single escalating penalty. The current system treats them as entirely separate failures, each with its own consequences. You can submit your return on time but pay late, or pay on time but submit late, and the two penalties don’t interact — but you can also be hit with both at once if you’re late on both fronts.
Late submission: the points system
Every time you submit a VAT return late, HMRC adds one penalty point to your record — similar in concept to a driving licence points system, submitted through MTD-compatible software, as we’ve covered separately. Points alone don’t cost you anything until you cross a threshold, at which point a £200 fixed penalty applies, and every further late submission after that triggers another £200 penalty.
The threshold depends on how often you file:
| Submission frequency | Points threshold |
| Annual | 2 point |
| Quarterly | 4 points |
| Monthly | 5 points |
Some returns don’t earn a point even if they’re late: your first VAT return after newly registering, your final return after deregistering, and one-off returns covering a period other than your usual monthly, quarterly, or annual cycle.
Points aren’t permanent. A point expires after 24 months if you haven’t hit the threshold in the meantime. Once you have hit the threshold and been penalised, the lapsing rule stops helping you — to reset to zero, you need a sustained period of full compliance (submitting everything on time) plus having filed any previously outstanding returns:
| Submission frequency | Compliance period to reset |
| Annual | 24 months |
| Quarterly | 12 months |
| Monthly | 6 months |
Late payment: percentage-based, and steeper than it used to be
This is the part where the rules have genuinely changed since they were first introduced, so it’s worth being precise about current rates rather than relying on guidance that predates April 2025.
If you pay within 15 days of the due date, there’s no late payment penalty — though interest still accrues from day one regardless of how quickly you eventually pay. Between 16 and 30 days overdue, a first penalty applies at 3% of the VAT outstanding at day 15 (this rose from 2% in April 2025). At 31 days or more overdue, a second penalty applies, calculated at 3% of the VAT outstanding at day 30, on top of the first penalty — and from day 31 onward, a daily penalty accrues at an annualised rate of 10% (up sharply from the original 4%) for as long as the balance remains unpaid.
On top of all of this, separate late payment interest accrues from the first day payment is overdue until it’s settled in full, charged at the Bank of England base rate plus 4%. That rate moves with the base rate rather than staying fixed — it currently sits at around 7.75%, but it’s worth checking the current figure rather than assuming it’s stayed where it was when this was last updated.
HMRC publishes the current VAT penalties and interest rates directly, which is worth checking periodically since these figures move with the base rate and have already changed once since the system launched.
A worked example for the VAT penalties system
Say you owe £10,000 and pay 38 days late. You’d face a first penalty of 3% on the amount outstanding at day 15, a second penalty of 3% on the amount outstanding at day 30, daily penalty charges accruing from day 31 to day 38 at the 10% annualised rate, plus interest from day one to day 38 at the prevailing rate. On a payment that’s just over five weeks late, that’s a meaningfully higher cost than it would have been under the original 2023 rates — which is exactly why it’s worth checking current figures rather than working from memory of how the system used to work.
What doesn't trigger a penalty and how to avoid one
The single most effective thing you can do is submit on time even when you can’t pay in full. Late submission and late payment are judged separately, so filing on schedule avoids the points system entirely, even if the payment itself is delayed. If you genuinely can’t pay, contacting HMRC before the 15-day mark to arrange a Time to Pay agreement stops the late payment penalty clock — though interest continues to accrue regardless of any payment plan.
Beyond that, the simplest practical habit is treating VAT as money that was never really yours to spend: setting aside the VAT element of each sale into a separate account as it’s collected, rather than discovering at return time that the cash has already gone elsewhere in the business.
Where this matters more for a travel business
If you’re a tour operator or travel agent operating under TOMS, getting the margin calculation wrong doesn’t just risk an incorrect return — it risks discovering a much larger VAT liability than expected, often well after the filing deadline has passed, once the correct margin treatment is established. At that point you’re not just correcting a number; you’re potentially facing both submission and payment penalties on a bill that’s larger than originally filed, with interest accruing the whole time the error went uncorrected. Getting TOMS treatment right from the outset isn’t just a compliance nicety — it’s what keeps you off this penalty system in the first place.
How LAS Accounting can help
We manage VAT compliance and filing for our clients, which in practice means deadlines that don’t get missed and figures that are right the first time, rather than corrected after the fact. If you’re concerned about your current VAT position, whether that’s existing penalty points, a payment you’re behind on, or uncertainty about whether your margin calculations are correct, it’s worth addressing before the next return is due rather than after. Talk to a specialist.
