Since January 2023, HMRC applies a points-based system to late VAT returns. You receive one penalty point each time a return is late; when your points reach a threshold, a 200 pound penalty applies, and a further 200 pounds for every late return after that. The threshold depends on how often you file: two points for annual returns, four for quarterly, and five for monthly. Points expire in time if you stay below the threshold.
The system replaced the old default surcharge with a fairer, more gradual approach: an occasional slip costs points rather than money, but repeated lateness builds to real penalties. It applies to the submission of the return, separately from penalties and interest on paying late.
How do VAT penalty points work?
Each VAT return you submit late earns one point. You accumulate points until you reach the threshold for your filing frequency, and only then does a 200 pound penalty become payable. After you are at the threshold, every further late return brings another 200 pound penalty, until you clear your points by a period of compliance.
What are the penalty point thresholds?
The threshold depends on how often you submit VAT returns: two points for annual filers, four points for quarterly filers, and five points for monthly filers. Because most businesses file quarterly, four late returns is the common trigger point for the first 200 pound penalty.
How do points expire?
If you stay below the threshold, individual points expire automatically around two years after the return they relate to was due. Once you have reached the threshold, points do not simply drop off: you clear them by submitting all returns on time for a set period of compliance and having no outstanding returns for the previous two years.
Does this cover late payment too?
No. Penalty points are for late submission of the return. Paying the VAT late is dealt with separately, through late-payment penalties that increase the longer the tax is outstanding, plus interest. It is possible to file on time but pay late, or the reverse, and the two regimes are assessed independently.
Where tax investigation cover fits
VAT is one of the areas HMRC examines most, and a VAT compliance check can arrive alongside penalty issues. Tax investigation insurance covers the professional fees of dealing with it. See our accountants’ scheme, or get a quote.