What this letter usually means
A VAT penalty letter normally falls into one of two groups, and it helps to know which one you are looking at because they work very differently.
The first group is about late submission of your VAT return. Since the rules changed, this works on a points based system rather than an automatic fine for every late return. The second group is about late payment of the VAT you owe. Here the penalty depends on how many days the payment is overdue and how much is still outstanding.
Your letter may also mention interest, which is charged separately on top of any penalty whenever VAT is paid late. It is common to receive a letter that touches on more than one of these at the same time, so read it carefully and note the dates and amounts it refers to.
Who it affects
These rules apply to all VAT registered businesses, whether you are a sole trader, a partnership or a limited company. They apply whether you file your returns annually, quarterly or monthly, although the points thresholds differ depending on how often you file.
If you are not yet registered but are approaching the threshold, it is worth understanding the rules before they apply to you. You can read more about the registration test on our page about when to register for VAT. Every VAT registered business must also keep digital records and file through compatible software under Making Tax Digital, so the way you submit returns is part of staying penalty free.
What you must not ignore
The single most important thing is not to ignore the letter or the underlying return or payment. Penalties grow over time, and the longer a payment sits unpaid the more it can cost. Please do not assume the problem will go away on its own.
Watch the dates closely. For late payment, the key moments are day 15 and day 31 after the due date. For late submission, the thing to watch is your points total and whether you are at the threshold for your filing frequency. If you genuinely cannot pay in full, contacting HMRC to arrange Time to Pay before the penalty triggers can stop the first late payment penalty arising at all.
You should also check that the return itself has actually been filed. A missing return keeps generating problems even if you think the figure has been dealt with.
What you may need to gather
Before you respond or ask for help, it is useful to pull together a few things so you can see the full picture.
- The penalty letter or notice itself, including any reference numbers.
- The VAT period the penalty relates to, with the due date for filing and for payment.
- Your current points total if the letter is about late submission.
- Details of the amount of VAT outstanding and the date any payment was made.
- Records of any contact you have already had with HMRC, including any Time to Pay discussions.
- Access to your VAT account and your accounting software so the figures can be checked.
Good bookkeeping makes this far easier, because the numbers are already in one place and reconciled.
What to do, step by step
Taking this in order keeps things manageable.
- Read the letter and identify the type. Decide whether it is about late submission, late payment, interest, or a combination.
- File any outstanding return straight away. If a return is missing, submitting it stops further late submission points building up.
- Check the payment position. Note how many days the payment is overdue and how much is outstanding.
- Pay what you can, or arrange Time to Pay. If you cannot pay in full, contact HMRC promptly to ask for a Time to Pay arrangement.
- Review your points. If you are at the threshold, understand that further late returns will each attract a £200 penalty until you complete a period of compliance.
- Consider whether you have a reasonable excuse. In some situations a penalty can be appealed, and a clear record of what happened helps.
A worked example
Here is how the first late payment penalty works in practice for a quarterly filer.
Quarterly filer pays 20 days late
A business files its VAT return on time but is short of funds and pays the VAT of £8,000 twenty days after the due date. Because nothing was paid by day 15 and no Time to Pay arrangement was agreed, a first late payment penalty applies. This is 3 percent of the amount that was still outstanding at day 15. As the full £8,000 was outstanding at that point, the first penalty is £240. Because payment was made on day 20, before day 31, the second penalty does not start to build up. Late payment interest also runs on the £8,000 for the period it was overdue, charged at the Bank of England base rate plus 4 percent. Had the business paid within 15 days, or agreed Time to Pay before day 15, the £240 first penalty could have been avoided entirely.
When to speak to an accountant
If the figures are unclear, if more than one penalty is involved, or if you simply want reassurance that you are handling it correctly, it is sensible to get help. An accountant can check that the penalty has been calculated correctly, make sure outstanding returns are filed, help you approach HMRC about Time to Pay, and look at whether an appeal is appropriate.
We help businesses across the UK with their VAT and with penalty letters every week, and we can take the worry off your hands. If you would like a clear way forward, you can start your quote or book a call and we will explain your options without any pressure.
A calm guide to how VAT penalties work under the points based late submission system and the late payment rules.
Frequently asked questions
How does the VAT points system work?
Each time you submit a VAT return late you receive one point. When your points reach the threshold for your filing frequency you receive a £200 penalty, and a further £200 for each later late submission while you remain at the threshold. The thresholds are 2 points for annual returns, 4 points for quarterly returns and 5 points for monthly returns. Points expire after a period of compliance, so filing on time clears them over time.
When does a VAT late payment penalty start?
For VAT due on or after 31 May 2025, if the amount is still unpaid after day 15 and no Time to Pay has been agreed, a first penalty of 3 percent of the amount outstanding at day 15 applies. If it is still unpaid at day 31, a second penalty builds up daily at an annual rate of 10 percent on the amount that remains outstanding. Paying within 15 days, or agreeing Time to Pay, avoids the first penalty.
Is interest charged as well as the penalty?
Yes. Late payment interest runs in addition to any penalty whenever VAT is paid late. It is charged at the Bank of England base rate plus 4 percent and accrues for the period the VAT remains unpaid, so settling the amount sooner reduces the interest as well as helping with the penalties.
What is Time to Pay and can it help?
Time to Pay is an arrangement with HMRC to pay what you owe in instalments when you cannot pay in full straight away. Agreeing one before the late payment penalty triggers can stop the first penalty arising, which is why it is worth contacting HMRC early rather than waiting. We can help you prepare and propose a realistic arrangement.
Do I still have to use Making Tax Digital software?
Yes. All VAT registered businesses must follow Making Tax Digital for VAT, keeping digital records and filing through compatible software. Filing the right way and on time is the simplest way to avoid late submission points building up in the first place.