Navigating the New Digital VAT Penalties: What UK Businesses Need to Know in 2025
As of January 2023, HMRC introduced a new points-based penalty system for late VAT returns and payments. Now in 2025, many businesses are starting to feel the real effects—especially those still adjusting to Making Tax Digital (MTD) requirements. If you’re running a business in England, understanding these changes is essential to staying compliant and avoiding unexpected penalties.
What’s Changed?
The new system is designed to be fairer and more consistent, replacing the previous flat-rate VAT default surcharge with a points-based approach. This means:
- Late submission penalties: You now get a penalty point each time you miss a VAT return deadline. If you reach a certain threshold (which depends on how often you file), you’ll incur a £200 penalty—and additional £200 penalties for every further late submission.
- Late payment penalties: These are based on how late your payment is:
- 0–15 days late: No penalty if you pay or arrange a Time to Pay agreement.
- 16–30 days late: 2% of the VAT unpaid at day 15.
- 31+ days late: 2% of VAT unpaid at day 15 plus 2% of VAT unpaid at day 30, and daily interest (currently at 7.75%).
Why Is This Important in 2025?
With MTD for VAT now fully rolled out and MTD for Income Tax on the horizon in 2026, HMRC is pushing hard for digital compliance. But many small businesses and sole traders are still adapting. We’ve seen clients accidentally trigger penalties simply due to software issues, confusion about filing dates, or assuming nil returns didn’t need submitting.
Key Takeaways for Businesses
- Stay on top of deadlines
Missing even a nil return can earn you a penalty point. Use digital calendars, automated reminders, or accounting software alerts to stay ahead. - Get your systems in order
If you haven’t yet fully embraced MTD-compliant software, now’s the time. It’s not just about staying compliant—it makes filing quicker and reduces errors. - Understand the penalty thresholds
The number of points you can accrue before getting a penalty depends on your filing frequency:- Annual returns: 2 points
- Quarterly: 4 points
- Monthly: 5 points
- Speak to your accountant early
If you’re having cash flow issues or think you’ll miss a payment, let us know. We can help you arrange a Time to Pay agreement with HMRC before penalties kick in.
Final Thoughts
The shift to digital taxation and the new penalty regime mark a significant change in how HMRC manages compliance. While the goal is to encourage good behaviour rather than punish mistakes, the reality is that many businesses are getting caught out.
At PSF Accounting, we’re here to guide you through these changes. Whether you need help getting MTD-ready, want to review your compliance process, or have questions about a VAT penalty, don’t hesitate to reach out.