More than 580,000 UK businesses were penalised for paying VAT late last year, highlighting the growing financial pressure many companies continue to face under HMRC’s tougher penalty regime.
Since the new rules were introduced in 2023, penalties are now charged separately for each late VAT payment. Businesses can face penalties of 3% once a payment becomes 16 days overdue, rising further after 30 days alongside daily interest charges.
For businesses already dealing with rising costs and tighter cash flow, the penalties can escalate quickly. HMRC is also charging late payment interest at 7.75%, increasing the overall cost of missing deadlines.
Matthew Priest, Partner at Forrester Boyd, said:
“We are seeing more businesses experiencing cash flow pressure, particularly where VAT liabilities build up unexpectedly. The key point is not to ignore the problem. Speaking to HMRC early and arranging a Time to Pay agreement can often prevent penalties from increasing further.”
Importantly, HMRC does not usually accept lack of funds as a reasonable excuse for late payment. However, businesses may be able to stop additional penalties from accruing by agreeing a Time to Pay arrangement before the debt becomes significantly overdue.
The financial consequences are expected to become even more severe from April 2027 when the current 3% penalties will increase to 4%. For larger VAT bills, this could add thousands of pounds in additional costs.
The latest figures are another reminder of the importance of regular cash flow forecasting and proactive financial management, particularly for businesses operating with tight margins or fluctuating income.
HMRC’s guidance on how late payment penalties work can be found in the guidance.
All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.
