What happens when VAT is paid late

From 1 January 2023 onwards, HMRC introduced a new regime for late VAT payment penalties, replacing the old default surcharge system. These reforms focus on simple, clear penalties based on how late the payment is

Penalty Timeline

Here’s how VAT penalties build up if you don’t pay by the due date:

• Day 1–15 overdue
  No late payment penalties apply, but late payment interest begins immediately from day 1
• Day 16–30 overdue
  HMRC charges a first late payment penalty of 3% of the VAT owed (based on what was unpaid at day 15)
• 31 days or more overdue
  The first penalty increases (3% of what was unpaid at day 15 and 3% of what was unpaid on day 30), and a second late payment penalty starts to accrue. This additional charge is calculated daily at a 10% annual rate on the outstanding balance until you pay or until the statutory assessment limit is reached

The sooner you pay what you owe, the lower your total penalties will be

Interest charges starting from day one

Even before penalties kick in, HMRC charges late payment interest on any VAT not paid by the due date

Key points:

• Interest runs from the first day the VAT is overdue until it’s paid in full
• It’s based on the Bank of England base rate plus 4%
• Interest is also charged on unpaid penalties themselves if they remain unsettled

This means interest can quickly add up, making late payment much more expensive the longer it goes unresolved.

Penalty points vs. late payment penalties

It’s worth noting that VAT has two separate systems:

1. Late payment penalties as covered above, based on overdue VAT.
2. Penalty points for late submission; A different system that rewards compliance and can lead to a surcharge if you accumulate too many points for late returns.

For this blog, we’re focusing on paying VAT late, but if you’re also late submitting returns, points can accumulate and lead to further charges.

What to do if you can’t pay on time

Here’s the most important part… don’t wait for penalties to hit

Contact HMRC before the deadline

If you know you can’t make your VAT payment, contact HMRC before the deadline. Early action creates the best chance of reducing or avoiding penalties and interest

MAKE SURE YOUR VAT RETURN HAS BEEN SUBMITTED BEFORE YOU CALL THEM! They can only take action on an active payment due, try to give yourself at least 24 hours before making the call

Ask for a Time to Pay arrangement

HMRC offers a Time to Pay (TTP) arrangement, which lets you spread your outstanding VAT over manageable monthly instalments

Key benefits:

• You can usually agree it before or after the deadline
• With an agreed TTP, you usually won’t get late payment penalties and you may be charged lower or no penalties at all
• It’s tailored to your business’s cash flow and circumstances

If you don’t keep up with the TTP terms, HMRC may cancel the arrangement and enforce penalties as if it never existed, so keeping to the plan is essential.

Appeal and review options

If you do receive a late payment penalty, HMRC will send a penalty decision letter

You can:

• Ask for a review within HMRC
• Appeal to an independent tax tribunal
• Your penalty might be cancelled or reduced if you had a “reasonable excuse” (e.g., illness, system issues)

Always respond promptly, there are time limits for appealing penalties

Top takeaways for businesses

1. Always plan ahead and prioritise VAT payment
2. If you might struggle to pay, contact HMRC before the deadline, don’t wait
3. A Time to Pay arrangement could save you substantial penalties and interest
4. Interest starts from day one, even if you’re negotiating a plan
5. Keep communication open. HMRC will often work with businesses that engage early