HMRC slaps 582k taxpayers with fines for late VAT payments

Jacob Grattage,Reporter, Business & Accountancy Daily. Croner.

Equivalent of one in four traders registered for VAT fined £302m in late penalties last year for missing HMRC quarterly payment deadlines.

With 2.3m entities VAT registered in the UK, the high level of VAT fines means the equivalent of 25% of registered VAT companies and sole traders were fined by HMRC.

A total of 582,000 fines were issued for late payment in 2024-25, a slight increase of 569,000 the previous year. This was equivalent to £302m in late payment penalties last year, up 2.7% from £294m in 2023-24, hardly changed in the 12-month period.

But this is a miniscule percentage of the total unpaid VAT, which made up 5% of the total tax gap. The latest estimate of the tax gap, published by HMRC last month, showed unpaid VAT had increased by 0.3%, adding a further £500m to the eye-watering £11.9bn VAT gap.

While there are high levels of fraud, Jaspal Dhillon, VAT partner at Lubbock Fine, warned the 2.2% increase in fines ‘shows how businesses are struggling under growing costs, regulatory burdens and an uncertain economic environment’.

Dhillon said another factor was the tougher VAT late payment penalty system introduced in 2023. This means taxpayers face ‘more regular fines for failure to pay’, he said. The penalty is equal to 3% of the outstanding VAT after 16 days overdue, then a further penalty of 3% at 31 days.

HMRC is ramping up investment to improve debt management and recovery capabilities, with a current spend of £629m over the current parliament.

Businesses cannot ‘afford to dither’ over their VAT debts, he added. ‘HMRC will be much tougher with businesses that hide their head in the sand and ignore their overdue tax bills.’

He added HMRC has been ‘liberal with fines for late paid VAT is because it is determined to reduce the mountain of overdue tax debt that its owed’. 

According to Dhillon, overdue tax debts amounted to £42.8bn for the 2024-25 financial year, with only £5.7bn of that debt in agreed repayment arrangements. 

Businesses unable to pay their VAT bill can try to negotiate an HMRC time to pay (TTP) arrangement in order to give them breathing space. 

‘If you’re a struggling business, the first thing you need to do is make sure your returns are filed on time and that you have requested a TTP from HMRC, as it can be the difference between survival and failure’, Dhillon added.