The VAT penalty regime changed fundamentally from 1 January 2023, with a new points-based system for late submissions and a two-stage late payment penalty replacing the old default surcharge. At the same time, the Schedule 24 inaccuracy penalty rules that apply to errors in VAT returns remain in force, with rates of up to 100% of the unpaid tax. Understanding how HMRC calculates each type of penalty and knowing how to challenge the calculation, is worth significant money.
On this page
- Schedule 24 inaccuracy penalties
- The behaviour test
- Schedule 41 failure to notify
- Points-based late submission penalties
- Late payment penalties
- Prompted vs unprompted disclosure
- Quality of disclosure reductions
- Suspension of careless penalties
- Special reduction
- Published Deliberate Defaulters list
- Default surcharge (legacy cases)
- How to defend a penalty assessment
Schedule 24 inaccuracy penalties (Finance Act 2007)
Schedule 24 to Finance Act 2007 applies to penalties for inaccuracies in VAT returns and other documents submitted to HMRC. The penalty is calculated as a percentage of the “potential lost revenue” (PLR), broadly, the amount of additional tax owed as a result of the inaccuracy.
The penalty percentage depends on three factors: the type of behaviour, whether it was prompted or unprompted and the quality of disclosure. The statutory ranges are:
Careless inaccuracy (paragraph 3)
An inaccuracy is careless where it results from a failure to take reasonable care. The standard is objective: a reasonably competent person exercising reasonable care would not have made the error. The penalty range is 0–30% of PLR, reducible to nil on unprompted disclosure with maximum quality reduction.
Deliberate inaccuracy (paragraph 3)
An inaccuracy is deliberate where the taxpayer knew the document contained the inaccuracy when submitted. The penalty range is 20–70% of PLR. It cannot be reduced below 20% (prompted) or 20% (unprompted with maximum disclosure), though reductions in practice will bring it closer to the floor.
Deliberate and concealed inaccuracy (paragraph 3)
An inaccuracy is deliberate and concealed where steps were taken to hide it, for example, falsifying records, creating fictitious invoices or actively misleading HMRC during the enquiry. The penalty range is 30–100% of PLR, with a floor of 30% (prompted) or 30% (unprompted).
The penalty tables in full
The table below shows the minimum and maximum penalty rates after applying disclosure reductions, for the three behaviour categories:
| Behaviour | Unprompted min | Unprompted max | Prompted min | Prompted max |
|---|---|---|---|---|
| Careless | 0% | 30% | 15% | 30% |
| Deliberate | 20% | 70% | 35% | 70% |
| Deliberate & concealed | 30% | 100% | 50% | 100% |
The behaviour test
The behaviour test is applied to the person who made the error, not to the business in the abstract. Where the inaccuracy was made by an employee, the question is whether that employee’s behaviour was careless or deliberate. Where the business uses an agent (accountant or tax adviser), the agent’s behaviour is attributed to the business for this purpose.
What ‘reasonable care’ means in VAT
HMRC’s own internal guidance (the Compliance Handbook at CH81120) confirms that the standard of care is that of a prudent and reasonable person in the taxpayer’s circumstances. For a large business with a tax department, the standard is higher than for a sole trader. Reliance on professional advice can demonstrate reasonable care, but only where the advice was given on the basis of accurate information and was reasonable advice for a person in that position to seek and follow.
Common careless errors
The Tribunal has found the following to be careless in VAT cases: mathematical errors in VAT calculations not caught by any checking process; applying the wrong VAT liability to a category of goods where the liability was unclear; failing to apply the partial exemption standard method override where turnover thresholds were met; and omitting a category of income from VAT returns without checking whether it was liable.
Common deliberate errors
Deliberate errors in VAT cases typically involve knowingly omitting income from returns, claiming input tax on invoices known to be false or deliberately applying a wrong rate of VAT to increase cashflow.
Schedule 41 failure to notify (Finance Act 2008)
Schedule 41 to Finance Act 2008 applies where a business should have registered for VAT but failed to do so. The penalty is calculated on the VAT that should have been declared during the period of non-registration (the “potential lost revenue”). The behaviour categories (careless, deliberate, deliberate and concealed) and disclosure reduction rules are the same as Schedule 24.
The penalty rate for failure to notify is higher than for inaccuracies in returns because HMRC takes the view that a business ought to know whether it needs to register for VAT. Where a business genuinely did not know it had exceeded the registration threshold, for example because it was trading partly through a third party and did not have accurate turnover figures, that is evidence pointing to careless rather than deliberate behaviour.
Points-based late submission penalties (from 1 January 2023)
The points-based regime replaces the default surcharge for VAT periods starting on or after 1 January 2023. It operates on a simple accumulation model:
How points accumulate
Every late submission of a VAT return earns one penalty point, regardless of whether any tax was owed. Points are added automatically by HMRC’s systems when a return is filed late. There is no discretion: the point is earned by the lateness alone.
The financial penalty threshold
A £200 financial penalty is triggered when the business’s point total reaches the threshold for its filing frequency:
- Annual returns: 2 points
- Quarterly returns: 4 points
- Monthly returns: 5 points
Once the threshold is reached, a further £200 penalty is charged for each subsequent late return, regardless of whether the total increases further.
How points expire
Penalty points expire automatically after a 24-month rolling period, provided the business has submitted all returns on time during those 24 months and has cleared any outstanding return obligations. A business that accumulates points but does not reach the threshold and then complies consistently will see its points fall away without incurring a financial penalty.
Interaction with reasonable excuse
A business with a reasonable excuse for a late submission can appeal the penalty point. If the appeal succeeds, the point is removed. Reasonable excuse appeals under the new regime follow the same principles as under the default surcharge: the excuse must be genuine, unexpected and causally connected to the failure to file on time.
Late payment penalties (from 1 January 2023)
The new late payment penalty regime also applies to VAT for periods starting on or after 1 January 2023. It is a two-stage financial penalty on the unpaid tax itself:
First penalty, 2% at 15 days
If VAT is unpaid at day 15 after the due date, a penalty of 2% of the unpaid amount becomes chargeable. There is a grace provision: HMRC will not charge the first penalty in the first year of the new regime where the business has a reasonable excuse or contacts HMRC to arrange a time to pay agreement before day 15. From the second year onwards, the penalty applies automatically unless a time to pay agreement is in place.
Second penalty, additional 2% at 30 days
If VAT remains unpaid at day 30 after the due date, a further 2% penalty is charged on the amount still outstanding (total exposure: 4% at day 30).
Daily rate penalty from day 31
If VAT remains unpaid after day 30, a daily penalty rate equivalent to 4% per annum on the outstanding amount accrues from day 31 until the amount is paid. This is in addition to the statutory interest on unpaid VAT under section 101 Finance Act 2009, which runs at the Bank of England base rate plus 2.5 percentage points.
Prompted versus unprompted disclosure
Whether a disclosure is prompted or unprompted is determined at the moment the disclosure is made, not at the time the error occurred. A disclosure is unprompted if, at the time it is made, HMRC has not indicated any intention to investigate the inaccuracy or failure in question. “Indicated” is interpreted broadly: a general compliance check letter covering the same VAT periods will usually make any subsequent disclosure prompted, even if HMRC has not specifically identified the error.
Where multiple errors are being disclosed, each is assessed separately for prompted vs unprompted status. It is possible for some errors in the same disclosure to be unprompted (if HMRC has not yet identified them) and others prompted.
The practical implication is that making a voluntary disclosure before HMRC opens an enquiry, using HMRC’s online voluntary disclosure process or writing to the relevant compliance office, produces the best possible penalty outcome. The financial benefit of acting before a compliance check letter arrives is substantial: for a deliberate error, the minimum penalty falls from 35% to 20% simply by being unprompted.
Quality of disclosure reductions
Once the behaviour category and prompted/unprompted status are determined, HMRC applies reductions for the quality of disclosure. Reductions are awarded on three dimensions, each assessed on a 0–30% scale (adding to a maximum 30% reduction across all three):
Telling (up to 30%)
The completeness and promptness of the information provided about the inaccuracy and its cause. A business that gives a full, frank and well-organised account of what went wrong and why obtains the maximum telling reduction. A business that drip-feeds information or provides incomplete explanations obtains a lower reduction.
Helping (up to 40%)
The extent to which the taxpayer assists HMRC in quantifying the liability. Providing workings, schedules and access to records that allow HMRC to verify the figures quickly attracts the maximum helping reduction. Requiring HMRC to do all the quantification work from scratch reduces it.
Giving (up to 30%)
The extent to which the taxpayer gives HMRC access to the relevant records. Promptly producing indexed bundles of relevant documents, rather than forcing HMRC to use formal Schedule 36 notices, attracts the full giving reduction.
The maximum combined reduction for the three components is 100% of the penalty within the available band. For a careless unprompted disclosure, a maximum-quality disclosure can reduce the penalty to nil. Use the HMRC penalty calculator to see how disclosure quality affects your specific penalty exposure.
Suspension of careless inaccuracy penalties
Paragraph 14 of Schedule 24 FA 2007 gives HMRC the power to suspend a careless inaccuracy penalty for up to two years. Suspension is available only for careless penalties, not for deliberate or deliberate and concealed. Suspension applies where HMRC considers the taxpayer capable of complying with conditions designed to prevent a recurrence.
Typical suspension conditions include: implementing a specific reconciliation process in the accounting software, obtaining periodic third-party VAT review, attending HMRC’s Business Education and Support Team or providing quarterly summaries to the compliance officer during the suspension period.
If all conditions are met during the suspension period, the penalty is cancelled. If a condition is breached or if a new inaccuracy penalty is incurred during the suspension period, the suspended penalty immediately falls due. Suspension should be actively requested: HMRC does not always offer it proactively, even where the statutory test is met.
Special reduction
Under paragraph 11 of Schedule 24 FA 2007, HMRC has a discretion to reduce a penalty below the minimum by reason of “special circumstances”. HMRC’s internal guidance confirms that special circumstances are something exceptional or out of the ordinary that makes the normal minimum inappropriate. They are not merely circumstances that mitigate the behaviour, those are already captured by the behaviour categorisation and quality reductions.
Special reduction is rarely granted but should always be considered in cases involving: severe personal circumstances unrelated to the inaccuracy (serious illness, bereavement), where applying the minimum penalty would be disproportionate to the underlying conduct or where exceptional co-operation with HMRC’s investigation went significantly beyond what the quality reductions already reflect.
Published Deliberate Defaulters list
Under section 94 Finance Act 2009, HMRC can publish the names, addresses and amounts of VAT owed by deliberate defaulters. Publication is an additional sanction beyond the financial penalty. HMRC’s criteria for considering publication include: the deliberate penalty relates to at least £25,000 of VAT; the default is in the most serious category of deliberate behaviour; and HMRC has assessed a penalty of at least 35% of PLR. Businesses placed on the list can apply for removal after 12 months if they pay the outstanding liability and demonstrate compliance.
The threat of publication is frequently a negotiating lever. Where a business cooperates fully, makes a high-quality disclosure and settles promptly, publication is much less likely and where HMRC has indicated it is being considered, demonstrating these factors in writing may secure a commitment that publication will not be pursued.
Default surcharge (legacy cases)
The default surcharge under section 59 VATA 1994 applied to late submission and late payment for VAT returns filed before the new regime took effect (1 January 2023 for quarterly filers). Legacy cases, where assessments or Tribunal appeals cover periods before that date, are still governed by the old rules.
Under the default surcharge, a business entered a surcharge liability period on first default and remained in it for 12 months. Each further default within the liability period triggered a surcharge at escalating percentages: 2%, 5%, 10%, 15%. The surcharge applied both to late submission (where there was tax to pay) and to late payment. Many default surcharge cases remain in the Tribunal backlog and continue to be decided under the old rules. The grounds for appeal, reasonable excuse, special circumstances and proportionality, are essentially the same as under the new regime.
How to defend a penalty assessment
Where HMRC raises a penalty assessment, the following strategy produces the best outcomes in the large majority of cases:
- Challenge the behaviour categorisation first. Before considering disclosure quality, assess whether the behaviour has been correctly categorised. A case that HMRC has assessed as deliberate may be properly careless on the facts. The difference in the minimum penalty is enormous and worth significant effort.
- Maximise quality of disclosure. Ensure that all three disclosure quality components, telling, helping, giving, are fully documented. If HMRC’s quality reduction assessment is too low, challenge it specifically rather than accepting the overall penalty figure.
- Consider suspension. If the penalty is careless, and you have not yet been offered suspension, ask for it formally. Provide a draft set of suspension conditions that are practical and demonstrate genuine commitment to compliance improvement.
- Assess special reduction. Even if there are no obvious special circumstances, the formal application for special reduction creates a paper trail and prompts HMRC to consider it properly. It can be pursued alongside an appeal without prejudicing either.
- Appeal if the categorisation or calculation is wrong. A penalty appeal follows the same 30-day window and the same review and Tribunal process as the underlying tax assessment. For the full procedural detail see our VAT assessment appeal guide. Use the HMRC penalty calculator to model the outcome under different scenarios before deciding whether to settle.
- Watch the reasonable excuse point for late filing and late payment penalties. Under both the old surcharge and the new regime, a genuine reasonable excuse can eliminate the penalty entirely. Reasonable excuse is a separate ground from behaviour categorisation and is decided on its own facts.
Frequently asked questions
What is the difference between a prompted and unprompted disclosure for VAT penalties?
An unprompted disclosure is one made before HMRC has indicated an intention to investigate the inaccuracy or failure in question. It attracts the most generous penalty reductions under Schedule 24 FA 2007: a careless penalty can be reduced to nil and a deliberate penalty to as low as 20% of the potential lost revenue. A prompted disclosure is made after HMRC has signalled an investigation. Reductions are still available but are less generous: careless can be reduced to 15%, deliberate to 35%. Timing the disclosure correctly and ensuring it genuinely qualifies as unprompted, is therefore a significant financial decision.
How does the VAT points-based late submission penalty work?
The points-based regime for late submissions applies to VAT returns for periods starting on or after 1 January 2023. Each late submission earns one penalty point. When the threshold is reached (4 points for quarterly filers, 2 for annual, 5 for monthly), a £200 financial penalty is triggered for that return and each subsequent late return. Points expire after 24 months if the business submits all returns on time during that period and meets any outstanding filing obligations. Points below the threshold carry no immediate financial penalty.
Can HMRC suspend a careless inaccuracy penalty?
Yes. Under paragraph 14 of Schedule 24 FA 2007, HMRC may suspend a careless inaccuracy penalty for up to two years where it believes the taxpayer can comply with conditions designed to prevent a recurrence of the inaccuracy. Suspension applies only to careless penalties, not to deliberate or deliberate and concealed. If the taxpayer complies with all suspension conditions during the suspension period, the penalty is cancelled. If the conditions are not met, the suspended penalty becomes payable. A taxpayer who believes their penalty qualifies for suspension should proactively raise it with HMRC rather than waiting to be offered it.
What is a reasonable excuse for a VAT penalty?
A reasonable excuse is an unexpected or unusual event outside the taxpayer’s control that prevented timely filing or payment. Common examples accepted by Tribunals include serious illness of the person responsible for filing, a third-party failure that the taxpayer could not have anticipated, a genuine and unforeseen technical failure with HMRC’s own systems or a natural disaster. Lack of funds is not in itself a reasonable excuse, though the underlying cause of the lack of funds may be. Ignorance of the law is generally not a reasonable excuse for a business registered for VAT, but genuine reliance on professional advice that turns out to be wrong can be.