Understanding VAT Penalty Points: What Every Business Needs to Know

Late VAT filing and late VAT payments now carry much sharper consequences than many businesses realise. Since HMRC introduced its VAT penalty points system, repeated delays can quickly lead to automatic £200 penalties, late payment charges and additional interest. 

At Naylor Accountancy Services, we continue to see businesses caught out simply because they are not fully aware of how the new rules work. This guide explains the system clearly so you can stay compliant, avoid unnecessary penalties, and keep your cash flow healthy. 

The VAT Penalty Points System: How It Works

For VAT accounting periods starting on or after 1 January 2023, HMRC introduced a new system for late filing of VAT returns. Instead of a single penalty for each failure, HMRC now issues penalty points, which build up over time. 

Here is how it works: 

• Each late VAT return earns one penalty point. 
• When you reach a certain threshold of points, HMRC charges a £200 penalty. 
• HMRC will notify you when a penalty is applied. 

This system applies to all VAT-registered businesses, regardless of size or sector. 

VAT Penalty Point Thresholds

Your penalty threshold depends on how often you file VAT returns: 

• Monthly returns

- 5 penalty points 

• Quarterly returns

- 4 penalty points 

• Annual returns

- 2 penalty points 

Example: 
A quarterly filer who submits four VAT returns late will reach the four-point threshold and automatically receive a £200 penalty. 

How to Reset Your Penalty Points

Penalty points do not last forever, but they can only be removed when: 

1. You submit all required VAT returns on time for a continuous period of 12 months, and 
2. You have submitted all outstanding returns for the previous two years. 

Once both conditions are met, your points reset to zero and your compliance record becomes clean again. 

There are also statutory time limits that prevent HMRC from issuing a new penalty point for older late returns. 

Late Payment Penalties: Separate From Filing Penalties

Late VAT submission and late VAT payment are treated separately. Even if you file on time, you can still face penalties for late payment of VAT. 

Late payment penalties work as follows: 

• 2% penalty on VAT still unpaid between 16 and 30 days after the due date 
• 4% penalty on VAT still unpaid 31 days or more after the due date 

This is in addition to late payment interest, which starts accruing from the day VAT becomes overdue until the liability is fully paid. 

How to Stay VAT Compliant and Avoid Penalties

To minimise the risk of penalty points and fines: 

• File VAT returns before the deadline, not on the day of the deadline 
• Pay VAT as early as possible, even if only part-payment is possible 
• Use digital records and reminders to track deadlines 
• Review your VAT quarters and cash flow planning 
• Ensure someone in your team is responsible for VAT compliance 

At Naylor Accountancy Services, we help businesses set up reliable VAT processes, so deadlines are never missed, and penalties are avoided. 

Speak to Us if You Need Support

If you are unsure about your current VAT position or if you have already received penalty points, we can review your filing history, explain what HMRC requires, and help you return to full compliance. 

For clear guidance and practical support with VAT, speak with our team today. 

📞 +44(0)1892 807 001 
📧 [email protected]