More than 580,000 traders were penalised for late payment of VAT last year, representing a quarter of businesses registered for VAT. A sure sign that the tougher penalty regime introduced in 2023 is hitting cash-strapped businesses.
Penalty regime
- A penalty will not be imposed if a trader presents a reasonable justification. Illness and personal issues are not considered valid justifications unless they are exceptionally severe. Insufficient funds are also not deemed valid, nor is dependence on a third party or the absence of a reminder from HMRC.
- However, a trader can prevent any additional penalties from accumulating by establishing a time to pay (TTP) arrangement with HMRC. For instance, penalties can be avoided if a business secures an arrangement prior to a VAT payment being 15 days overdue.
Traders facing difficulties in settling a VAT obligation should refrain from disregarding the overdue invoice. Instead, it is advisable to negotiate a TTP arrangement to allow for some financial relief.
Regardless of whether any late payment penalties are applied, late payment interest will accrue from the due date until the VAT liability is settled. The current interest rate is set at 7.75%.
Penalty increases in 2027
Beginning in April 2027, the 3% late payment penalty that is applied after day 15 will rise to 4%, as will the penalty imposed after day 30.
At present, if a business is, for example, 50 days late in paying a VAT liability of £50,000, the total penalties incurred amount to £3,273. This total will escalate to £4,273 starting in April 2027; a clear indication that businesses must prioritize their cash flow management.
HMRC’s guidance on how late payment penalties work can be found in the guidance.