With the annualised rate for daily penalties increasing by 250% alongside the late payment interest rate rising, it’s more expensive than ever to be late when paying VAT.
If you have missed the deadline for filing your VAT return and paying your tax bill, the last thing you should do is bury your head in the sand and ignore your VAT liability.
Here’s an explanation of how HMRC applies penalties and interest to late VAT payments, and what you can do to prevent your VAT debt from snowballing.
VAT late payment penalties
HMRC considers the payment and penalty for each VAT return separately, but the penalty can be avoided by making a payment within 15 days of the original due date.
If the late payment is made after this point, HMRC will charge an initial penalty of 3% (up from 2%).
However, if payment is made more than 30 days late, an additional 3% will be charged – totalling 6%.
Additionally, HMRC will immediately implement a daily penalty after this 30-day period. The annualised rate of the daily penalty has increased to 10% from the previous 4%.
VAT late payment interest
HMRC also charges interest from the day after the due date until the outstanding VAT is fully paid.
This means that even if payment is made in full within 15 days and there is no penalty, interest will still be charged for each day that the VAT bill was overdue.
The interest rate is calculated by adding 2.5% to the Bank of England base rate, but as of 6th April 2025, HMRC has introduced an additional 1.5% surcharge.
Currently, the Bank of England base rate is 4.5%, so the late payment interest rate is now 8.5%.
Late VAT repayment plans
The 8.5% late payment interest rate and 10% daily penalty rate are quite harsh, so it’s best to make a payment on account with whatever funds are available by the due date.
This will help you to avoid interest and reduce penalties on the outstanding amount.
If you can’t make a payment on time, you can ask HMRC to set up a ‘Time to Pay’ arrangement. This will allow you to pay in instalments and avoid further penalties.
However, this won’t remove any penalties you have already received, and you will still be charged interest. This type of VAT repayment plan is also unavailable for anyone using a cash accounting scheme or an annual accounting scheme.
Get help with VAT management
Of course, the best way to avoid penalties and interest charges is to make sure you file your tax return and pay the VAT due before the deadline for the relevant tax year.
To do this, you must keep accurate records and submit declarations on time – which may require help from professional tax consultants like our accountants in Barnsley.
Here at gbac, we offer a variety of bookkeeping and tax management services, so why not call us on 01226 298 298 to find out how we can help you manage VAT payments?
Alternatively, you can email your information to info@gbac.co.uk and we’ll be in touch.