Understanding the new vat penalty regime and how to stay compliant

Understanding the New VAT Penalty Regime and How to Stay Compliant

December 2, 2025

Background

From April 2025, HMRC introduced significant changes to the VAT penalty system. From HMRC’s perspective these reforms aim to make penalties fairer, encourage timely compliance, and reduce the tax gap. However, from a SME’s perspective the new rules are stricter and can lead to substantial costs for businesses that miss deadlines.

Why the Change?

The old “default surcharge” system was replaced in January 2023 with a points-based regime for late submissions and a structured penalty system for late payments, however in April 2025, HMRC increased penalty rates and interest charges further to reinforce compliance. 

Key Features of the New VAT Penalty Regime

There are now two aspects to the HMRC VAT Penalty regime – one which relates to submission of VAT Returns and one that relates to VAT Payments.

1. VAT Return Submission Penalties – [The Points System]

  • Each late VAT return earns one penalty point.
  • When you reach the threshold, you incur a £200 penalty for every subsequent late return:
    • Annual returns: 2 points
    • Quarterly returns: 4 points
    • Monthly returns: 5 points
  • Points reset only after a compliance period of on-time submissions (e.g., A period of four- or 12-months consecutive quarters for quarterly filers). 

2. VAT Payment Penalties

  • Up to 15 days late: There is no penalty, but interest accrues.
  • Day 15: 3% of outstanding VAT.
  • Day 30: Additional 3%.
  • From Day 31 onwards: Daily penalty at an annualised rate of 10%, plus interest at Bank of England base rate + 4%. 

VAT Payment Interest Charges

  • Late payment interest is now 4% above the base rate, charged daily until full payment is made. 

What are the Practical Steps to Stay Compliant now?

Step 1. Submit VAT Returns on Time

  • Even if you can’t pay, filing on time avoids penalty points.
  • Use the Making Tax Digital (MTD) – features in Xero or QuickBooks to action this, at a minimum. 

Step 2. Pay VAT Amounts Promptly

  • Set up reminders or use the direct debit option with HMRC
  • If cash flow is tight, then contact HMRC for a Time to Pay arrangement — this stops penalties however interest will still apply. 

Step 3. Monitor Penalty Points

  • Keep track of your compliance record. And aim to ensure points are reset by submitting your VAT returns on time!

Step 4. Plan Ahead

  • Budget for the payment or your VAST amounts, such as putting funds aside in a savings account each month

Why This Matters

HMRC’s new regime is designed to reward compliance and to penalise persistent lateness by tax. A single missed deadline might seem minor, but repeated delays in submission of VAT Returns or VAT Payments can quickly lead to £200 penalties and escalating interest!

At Sakura, we’re here to help you navigate these decisions with confidence and compliance.

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