Pay your VAT a fortnight late and it costs nothing. Pay it sixteen days late and it costs 3% — and the percentages have been heavier since 10 July 2025, when the first penalty rose from 2% to 3% at both the 15-day and 30-day marks and the ongoing charge doubled to 10% a year. Late payment and late filing are now two separate regimes with separate consequences, which is why a business can be fully up to date with its returns and still accumulating penalties.
Late payment: the fifteen-day cliff
Nothing is charged for the first 15 days after the due date. That is a deliberate grace period, and it is the single most useful fact in this article: a payment that slips by a week costs only interest.
After that the structure is mechanical. At day 15, a first penalty of 3% of the VAT still outstanding. At day 30, a further 3% of whatever remains unpaid at that point — so a debt left untouched for a month attracts 6% in total. From day 31, a second penalty accrues daily at an annualised 10% on the outstanding balance until the debt is cleared, and it keeps running for as long as the balance does. These rates replaced the previous 2% / 2% / 4% structure on 10 July 2025; any advice written before that date understates the cost by roughly half.
Interest runs separately and from day one. HMRC charges late payment interest at the Bank of England base rate plus 4% — a margin increased from 2.5% on 6 April 2025 — which put the rate at 7.75% from 9 January 2026. Interest is not a penalty and is not something HMRC negotiates away; it is the cost of the borrowing, and it runs alongside the penalties rather than instead of them.
Time to Pay stops the clock
The rule that saves the most money is the least used. If you agree a Time to Pay arrangement with HMRC, penalties stop accruing from the date you ask, provided the request is ultimately agreed and you keep to the terms. Approach HMRC on day 12 with a realistic proposal and the 3% at day 15 need never arise; wait until day 40 and you have already paid 6% plus daily accrual for the privilege of having the same conversation.
The proposal has to be credible — a schedule the business can actually meet, with the reasoning behind it — and it must be honoured. A defaulted arrangement puts the penalties back on the table, calculated as though the arrangement had never existed. What HMRC rewards here is early contact, not eloquence.
Late filing is a separate regime entirely
Submitting the return late triggers points, not percentages. Each late return earns one point, and a penalty of £200 falls due when a business reaches its threshold — four points for quarterly filers, five for monthly, two for annual — and again for every subsequent late return while sitting at the threshold. Points expire after 24 months individually, but clearing a full set requires a period of compliance (12 months for quarterly filers) and having filed every return due in the preceding 24 months.
The consequence worth internalising: nil and repayment returns count. A business that owes nothing, files nothing and assumes no harm is done accumulates points to the threshold and then pays £200 a time for returns that carried no tax at all.
Reasonable excuse, appeals and what actually works
Penalties can be cancelled where there is a reasonable excuse — and HMRC applies the test more narrowly than most taxpayers hope. Serious illness, bereavement, fire, flood and genuine unexpected software or bank failure can qualify. Lack of funds generally does not, unless the underlying cause of the shortage was itself outside your control. Reliance on someone else does not, unless you took reasonable care to avoid the failure. The excuse must also have lasted for the relevant period, with the obligation put right without unreasonable delay once it ended.
In practice, three things determine outcomes: how quickly you engaged with HMRC, whether the explanation is documented contemporaneously, and whether the compliance history supports the story. A first slip after six clean years reads very differently from the fourth in two years. Appeals go first to HMRC for a statutory review, then to the First-tier Tribunal, and the review stage resolves more cases than people expect.
The controllable part
Nearly all VAT penalties are cash-timing failures rather than compliance failures, and the fixes are unglamorous:
- Diarise the payment date, not the filing date — they are the same day, and most businesses treat submission as the finish line;
- File even when you cannot pay. The two regimes are independent: filing late adds points on top of a payment problem you already have;
- Set the VAT aside as it is collected, ideally in a separate account. VAT is not working capital, though a great many businesses finance themselves with it until the quarter they cannot;
- Call before day 15, with a schedule, whenever the money will not be there;
- Check direct debit timing. Payment on account and direct debit collection dates are not the same as the standard due date, and assuming otherwise is a recurring source of one-day failures.
Acumon handles VAT filing and payment discipline through VAT compliance and VAT returns work, negotiates Time to Pay arrangements where cash is genuinely tight, and takes on penalty appeals as part of tax dispute resolution. If penalties have already started, the number that matters is how many days old the debt is — and it is always cheaper to have that conversation today than next week.