If you run a VAT registered business, and you want to stay in good standing with HMRC, then here's a free tip from us - pay your VAT on time!

Miss a deadline, and you could face a VAT late payment penalty. And with the introduction of the new points-based system, even occasional slips can add up quickly.

HMRC now assigns points for late VAT payments, which can accumulate and lead to larger penalties if deadlines are repeatedly missed. Understanding how this system and the interest charges work, your business can avoid unnecessarily losing money on fines.

So let’s check out the new VAT late payment points system, explain how penalties and interest are calculated, and learn  to stay on top of your VAT obligations.
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VAT late payment penalties and the new points system

A VAT late payment penalty is a charge applied when a business fails to pay its VAT on time. It’s important to note that this is separate from any interest that may accrue on the overdue amount. 

While previously HMRC issued one-off penalties for late payments, the system has now shifted to a points-based approach designed to encourage consistent compliance. Under the new system, points are assigned every time a VAT payment is late. 

These points remain on your record for 24 months and can accumulate if deadlines are repeatedly missed. For example, if a business misses a VAT payment twice in two years, the points from the first late payment may still be active when the second occurs, increasing the risk of financial penalties.

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Here’s how the points system works in practice:

• Points allocation: HMRC assigns a set number of points each time a payment is late.
  
• Escalation: Once a certain threshold of points is reached, a financial penalty is triggered.
  
• Repeat offences: The more points accumulated, the higher the potential penalty, even if individual payments are only slightly late.
  

This system is designed to reward consistent compliance while making it easier for HMRC to identify businesses with repeated late payments. Simple steps like keeping accurate records and setting reminders can help prevent points from stacking up and reduce the risk of costly penalties.
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VAT penalty thresholds explained

The number of points you can accumulate before a financial penalty is issued depends on how often you file your VAT returns:

Once you reach the threshold for your filing frequency, HMRC will apply a fixed financial penalty the next time you miss a deadline.
Until you bring your record back into compliance, every further late submission or payment will trigger an additional penalty.

This setup encourages ongoing punctuality rather than punishing isolated mistakes, but it also means repeated small delays can become costly over time.
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Interest on late VAT payments

In addition to VAT late payment penalties, HMRC charges interest on any overdue VAT. This interest is calculated from the day after the payment was due until the day it is paid in full. Interest ensures that late payments don’t go unpunished, even if a penalty hasn’t been triggered yet.

For example, if a business owes £5,000 VAT and pays 10 days late, HMRC will charge interest on the £5,000 for those 10 days. If points have accumulated from previous late payments, a penalty may also be added.

How to clear or appeal VAT penalty points

The good news is that points don’t stay on your record forever, and you can sometimes appeal them.

• Points expiry: VAT penalty points automatically expire after 24 months, provided you stay compliant and don’t hit your threshold again.
• Clearing points after a penalty: Once you reach the penalty threshold, you’ll need to complete a ‘period of compliance’, a set number of returns filed and paid on time, before your record resets to zero.
• Appealing a penalty: If you believe HMRC has applied a penalty unfairly, you can appeal through your VAT online account. Valid reasons can include illness, system errors, or payments made on time that weren’t processed correctly.

Taking these steps helps you maintain a clean compliance record, and avoid future penalties for repeat lateness.

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How to avoid VAT late payment penalties and manage your obligations

The good news is that avoiding VAT late payment penalties is often pretty easy with a bit of planning. Being organised and proactive will prevent points from stacking up and keep interest charges to a minimum. 

So make sure you do the following:

1. Keep accurate records

Ensure your VAT returns are based on reliable, up-to-date accounts. Mistakes or missing information can lead to delays.

2. Set reminders

Mark VAT payment and filing deadlines in your calendar, and consider automated reminders to stay on track.

3. Pay early if possible

If your cash flow allows, paying VAT before the deadline removes the risk of points or interest altogether.

4. Seek professional advice

‍An accountant can help you stay in compliance and free of hefty penalties.

Understanding the new points-based system helps businesses see the bigger picture - it’s not just a one-off fine, but an accumulating record that can lead to larger penalties over time. Again, being proactive, organised, and mindful of deadlines is the best way to stay on HMRC’s good side.

For personalised advice on managing VAT obligations and avoiding penalties, consulting a professional can save both time and money in the long run.

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