More than 580,000 traders faced penalties for late VAT payments last year, accounting for a quarter of all VAT-registered businesses. This shows that the tougher penalty regime introduced in 2023 is putting pressure on cash-strapped businesses.
Penalty regime
Each late payment of VAT is considered separately, with penalties charged as follows:
| Days late | Penalty |
| Up to 15 | None |
| 16 to 30 | 3% of outstanding VAT |
| More than 30 | A further 3% penalty, plus a daily penalty at a rate of 10% p.a. on the outstanding VAT (charged beginning after the initial 30-day period) |
- A penalty is not charged if a trader has a reasonable excuse. Illness and domestic problems do not count as valid excuses unless really serious. Lack of funds also does not count, nor does reliance on a third party or a lack of a reminder from HMRC.
- A trader can, however, avoid any further penalties accruing by entering into a time to pay (TTP) arrangement with HMRC. For example, penalties are avoided if a business secures an arrangement before a VAT payment is 15 days late.
Traders struggling to pay a VAT liability should avoid ignoring the overdue bill. Instead, try to negotiate a TTP arrangement to provide a breathing space.
Regardless of whether any late payment penalties are incurred, late payment interest is charged from the due date until the date that a VAT liability is paid. The rate charged is currently set at 7.75%.
Penalty increases in 2027
From April 2027, the 3% late payment penalty charged after day 15 will increase to 4%, as will the penalty charged after day 30.
Currently, if a business is, say, 50 days late paying a VAT liability of £50,000, the total penalties charged amount to £3,273. The total will increase to £4,273 from April 2027; a stark warning that businesses need to get on top of their cash flow management.
HMRC’s guidance on how late payment penalties work can be found in the guidance.
For more information, contact us on 0330 1070 873 or email info@smh.group.
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