The points-based penalty system for late VAT returns has been in force since 1 January 2023, but the practical bite has only really been felt in the last 18 months as more businesses reach their threshold. If you have submitted even one VAT return late since the new regime started, you already have a point on your record — and most directors do not realise it.
The points threshold by filing frequency
The threshold at which a financial penalty kicks in depends on how often you file:
- Quarterly filers: four points triggers a £200 penalty.
- Monthly filers: five points.
- Annual filers: two points.
Each late submission earns one point. Once you cross the threshold, every subsequent late return triggers a further £200 — there is no escalation in the amount, but the cadence can compound quickly.
How points expire
Points have a shelf life. Each individual point expires 24 months after the month in which it was awarded — provided you have not yet reached the penalty threshold. Once you hit the threshold, the rules change: you have to submit every return on time for a defined "period of compliance" (12 months for quarterly filers, 6 months for monthly, 24 months for annual) AND ensure all returns due in the previous 24 months are filed. Only then does the slate wipe to zero.
Nil and repayment returns count too
One of the most common misconceptions we hear from clients: "I had nothing to declare so it does not matter if I file late." Wrong. Nil returns and repayment returns are treated identically to liability returns under the points system. If you are dormant or between contracts, the obligation does not pause — you must still file by the deadline.
Late payment penalties are separate
Crucially, the points relate only to late filing. Late payment is governed by a parallel regime:
- Day 1 to 15 after the due date: no penalty if paid in full or a Time to Pay arrangement is agreed.
- Day 16 to 30: a first late payment penalty equal to 2% of the unpaid VAT.
- Day 31 onwards: a further 2% penalty plus a daily-accruing second penalty at 4% per annum.
Interest accrues from day one regardless, at the Bank of England base rate plus 2.5%. With base rates where they are, that is a meaningful cost on top of the penalty.
The "reasonable excuse" defence
You can appeal a point or a penalty by claiming a reasonable excuse. HMRC's published examples include serious illness, bereavement, a fire or flood at business premises, and IT failures that you could not have foreseen. Forgetting, being too busy, or relying on a third party who let you down are not reasonable excuses. We see appeals succeed roughly 30 to 40% of the time when there is documented evidence — bank confirmations of an attempted payment, a doctor's letter, HMRC's own server outage notices.
Practical steps to stay out of the penalty zone
- Check your current point balance. Log into your Business Tax Account and review the penalties section. Many directors are surprised by what they find.
- Set up direct debit for VAT payments. It eliminates one of the two failure modes (late payment) and HMRC takes the amount on the deadline plus three working days.
- File even when you cannot pay. The points relate to filing. If cash is tight, file the return on time and contact HMRC about a Time to Pay arrangement — this protects you on the points side.
- Use our VAT compliance service if you are at risk of crossing the threshold. We have rescued numerous clients on three points who were one bad week away from a £200 charge.
If you have already received a penalty notice or are concerned about your standing with HMRC, contact us for a confidential review. We can usually clarify your points position within an hour and identify whether any are eligible for appeal. For broader information on related obligations, see our HMRC insights library, and to engage our team proactively before your next return falls due, book a 20-minute call.