Counting the cost of unpaid VAT

In the recent 2021 Spring Budget, the government announced major changes to the VAT penalty regime for late returns and payments. While the impact of this on most businesses is relatively minor, for example in comparison with the changes to Corporation Tax, the consequences of being unaware of these changes could be a costly fine.

Old rules

A “default period” lasting 12 months would commence when a VAT-registered business was first late in paying their VAT or submitting a return.

If the business was late paying or submitting its return again within that default period, i.e. within 12 months of the “default”, then a series of penalties would kick in, the detail of which we will not go into here.

This gave businesses the opportunity to pay late or submit a late return if extenuating circumstances demanded it; for example, to help with a cashflow crisis or if software or accounting problems delayed the preparation of a return. Providing the business was careful to avoid another default within 12 months, no penalty would be levied.

New rules

The new rules will replace the current default surcharge regime. Where VAT has been paid late, the following penalty regime will apply:

• No penalty for payments made within 15 days of the due date

• 2% of the tax outstanding for payments made after day 15 but within 30 days

• 4% of the tax outstanding for payments made after day 30.

An additional penalty will be applied on a daily basis at an annual rate of 4% from day 31 on the tax that remains outstanding.

Businesses agreeing a time-to-pay arrangement with HMRC will stop the penalties as the tax is treated (for penalty purposes) as being paid on the day the arrangement is proposed to HMRC, although interest will still be charged. That said, the circumstances in which HMRC will agree a time-to-pay arrangement are extremely limited.

Furthermore, a points-based penalty regime will apply for failure to submit a VAT return on time. Businesses will accumulate one point for each failure, and a penalty of £200 will be applied when specific thresholds are exceeded and for every failure to submit thereafter.

The thresholds will be:

• Two points for annual VAT returns

• Four points for quarterly VAT returns

• Five points for monthly VAT returns.

These points will expire after 24 months unless the thresholds have been breached.


These rules apply from April 2022, for payments and returns relating to periods commencing on/after 1st April 2022. Clients are recommended to ensure that any directors and staff responsible for VAT are made aware of these new rules.