HMRC VAT Penalty Updates 2025: What Every Business Needs to Know

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October 28, 2025

HMRC VAT Penalty Updates – April 2025

In April 2025, HMRC introduced key changes to VAT penalties and interest rates to ensure timely compliance and accurate reporting. These updates modify the VAT late submission and payment system that was first rolled out in January 2023. Businesses must stay aware of these changes to avoid unexpected fines and interest charges.

1. VAT Penalty Points System

HMRC has now implemented a points-based penalty system for late VAT returns. Each time a VAT return is submitted late, points are added to the business’s account. Once a threshold is reached, a fixed penalty applies.

Submission Period	Points Threshold	Points Reset Condition
Annual VAT returns	2 points	Two annual returns submitted on time
Quarterly VAT returns	4 points	Four quarterly returns submitted on time
Monthly VAT returns	5 points	Six monthly returns submitted on time

Penalty: £200 each time the points threshold is reached.
Retention: Points remain active until all VAT returns for the past 24 months are submitted, and the ‘clock’ is reset.

Exceptions: No penalty points will be issued for:

The first VAT return for newly registered businesses
The final VAT return after deregistration
One-off VAT returns covering an irregular period

2. Late Payment VAT Penalties

From April 2025, HMRC has increased penalty rates for late VAT payments.

Grace Period: Payments made within 15 days incur no penalty (though daily interest applies).
Late Payment Penalty 1: 3% of the VAT due on day 15 plus another 3% on day 30 (previously 2% each).
Late Payment Penalty 2: A daily penalty of 10% per annum from day 31 until the VAT is fully paid.

3. Late Payment Interest

The late payment interest rate has also been raised to 4% above the Bank of England base rate (previously 2.5%). This interest accrues daily from the first day the VAT is overdue until payment is complete.

4. How to Avoid VAT Penalties

Avoiding VAT penalties requires proactive management and timely communication with HMRC. Follow these best practices:

Pay as early as possible: Even partial payments reduce total penalties and interest.
Request a Time-to-Pay Arrangement: Contact HMRC if you cannot pay in full. If approved, penalties are paused (interest still accrues).
Stay compliant: Submit VAT returns on time, even if payment cannot be made immediately.
Use HMRC’s online payment plan: For VAT under £100,000 with no other HMRC debts or outstanding returns, an online plan is available.

5. Seek Professional VAT Support

Understanding VAT compliance can be challenging, especially with evolving HMRC rules. Professional guidance can help your business stay penalty-free while optimising cash flow.

At Adept Accountax, our experienced VAT accountants can:

Ensure timely and accurate VAT submissions
Manage correspondence with HMRC
Help reduce or eliminate penalty risks
Advise on VAT planning and compliance

📅 Book an Expert VAT Review today and ensure your business stays compliant with HMRC’s latest regulations.