VAT Penalty Regime Changes Introduced from 5 April 2025: What Businesses Need to Know

VAT Penalty Regime Changes Introduced from 5 April 2025: What Businesses Need to Know

From 5 April 2025, changes to the VAT penalty regime officially came into effect. These changes follow the major overhaul introduced in January 2023 and were announced in the 2025 Spring Statement. The revised VAT penalty regime was introduced to encourage prompt payments and reduce overdue VAT liabilities.

As a firm of Chartered Accountants and Tax Advisers based on the South Coast, we’re here to help you stay informed. Our VAT Compliance Manager, Yvonne Collings, explains everything you need to know.

A Quick Recap: The VAT Late Submission Penalty System

Before diving into the new penalty rates, here’s a reminder of how the late submission penalty system works.

For each VAT return submitted late, a business receives one penalty point. Once the threshold is reached, a £200 penalty is issued, with further £200 penalties for each additional late return.

You may avoid points and penalties if you have a reasonable excuse for missing a deadline.

Penalty thresholds by submission frequency:

Example:

A quarterly VAT filer with three penalty points would incur a £200 penalty if the next return is submitted late, reaching the threshold of four. Further late returns would each result in an additional £200 penalty.

Resetting penalty points:

Penalty points can be reset to zero if:

• All returns are submitted on time for the compliance period (based on filing frequency).

• Points that don’t reach the penalty threshold expire after two years.

What Happens When You Change Your VAT Accounting Period?

If a business changes its VAT accounting period, existing penalty points are adjusted as follows:

Please note: if you’ve taken over a VAT-registered business as a Transfer of a Going Concern, its penalty points do not transfer to you.

Exceptions to Late Submission Penalties

There are a few scenarios where late submission penalty points do not apply:

• The first VAT return submitted after registering for VAT.

• The final VAT return submitted after cancelling a VAT registration.

• One-off VAT returns that don’t match a monthly, quarterly, or annual cycle.

Increased Late Payment Penalties from 5 April 2025

The most significant change to the VAT penalty regime was the increase in penalties for late VAT payments. These penalties apply to outstanding amounts and now follow this structure:

Late Payment Charges:

• Up to 15 days overdue
  No penalty if VAT was paid in full or a payment plan was arranged during this period.

• 16 to 30 days overdue
  A first penalty of 3% applied to VAT owed at day 15, if paid between days 16–30.
  (Previously 2%)

• 31+ days overdue
  A first penalty of 3% on VAT owed at day 15 plus 3% on VAT owed at day 30.
  (Previously 2% per stage)

• Second penalty (after 31 days overdue)
  Charged at a daily rate of 10% per annum until full payment or an agreement was reached.
  (Previously 4% per annum)

If you were unable to pay your VAT bill in full, HMRC encouraged contacting them promptly to arrange a payment plan.

Late Payment Interest

Interest continues to apply from the day the VAT payment became overdue until full payment was made. The rate used is the Bank of England base rate + 2.5%.

If your business is part of a VAT group, additional rules apply when companies join or leave the group. Please contact us for further guidance tailored to your specific structure.

How Lewis Brownlee Can Help with the VAT Penalty Regime

At Lewis Brownlee, we are VAT specialists who can help you avoid penalties and interest by submitting accurate returns on time.

With the revised VAT penalty regime now in force, it’s more important than ever to stay compliant. Whether you need help navigating group VAT, understanding how the rules apply to your business, or simply managing your submissions, we’re here to support you.

Get in touch with our expert team today — and let us help you stay on top of your VAT obligations.