UK VAT Late Payment Penalties Increase – HMRC Policy Update 2025

On April 1, 2025, the UK's HMRC released a policy paper on the increased penalties for late VAT and Making Tax Digital for Income Tax Self-Assessment payments. 

The paper provides information on the penalties' increase, policy objectives, a summary of the economic impact, and the effect on households, families, and businesses. Increasing penalties for late VAT payments is part of the government's package and efforts to close the tax gap.

Impact of the Increased Penalties

Under the new rules for penalties for late VAT payment, the penalty for 15-day late payments is increased from 2% to 3% on the unpaid VAT. If taxable persons are late by 30 days, a penalty of 3%, instead of the previous 2%, will apply on top of the 15-day penalty.

Furthermore, taxable persons will be charged an extra 10% per year on the due VAT for 31 days or more of late payments. This is an increase of 6% from the previous penalty of 4%.

The introduced measure aims to create a wider difference between compliant and non-compliant taxable persons, where a stricter penalty policy should contribute to more taxable persons making payments on time. Furthermore, HMRC added that stricter penalties should encourage taxable persons to contact them and set up a payment plan for their due VAT.

The UK government expects a significant increase in revenue due to the new measure, from GBP 5 million in fiscal year 2025-06 to GBP 125 million in fiscal year 2029-30.

Regarding the economic impact on individuals, households, families, and businesses, there should be no downsides or adverse effects for those who pay their obligations on time. Therefore, only taxable persons who fail to meet the payment deadlines will bear the burden of stricter penalty rules.

Conclusion

With stricter regulations, the UK government and HMRC, as governing body, continue their efforts to reduce the tax, including VAT, gap and ensure more taxable persons fulfil their obligations. Moreover, the implemented measure aims to ensure that VAT payments are made on time, thus awarding those who make timely payments and imposing additional financial burdens on those who fail to make them on time.

Source: HMRC