Key takeaways
- New VAT penalty system: From January 1, 2023, HMRC introduced new late submission and late payment penalties, replacing the old surcharge system.
- Healthcare VAT exemptions expanded: From May 1, 2023, VAT exemptions now include medical services supervised by pharmaceutical staff.
- Zero-rated medicines extended: Prescription drugs supplied under Patient Group Directions (PGDs) are now zero-rated for VAT.
In short: The main UK VAT changes in 2023 were a new penalty regime and wider healthcare reliefs. From January 1, 2023, HMRC replaced the default surcharge with points-based late submission penalties and late payment penalties. From May 1, 2023, healthcare VAT exemptions and zero rating for some prescription medicines were extended.
Update (October 2026): HMRC increased late payment penalty rates from April 1, 2025. The first penalty rose from 2% to 3% of the VAT owed at day 15. A further 3% (previously 2%) applies to VAT still owed at day 30. The second penalty, charged daily from day 31, rose from 4% to 10% a year. Source: GOV.UK.
The UK VAT system saw several changes in 2023. The main ones affect the VAT penalty regime, VAT-exempt goods and zero rated VAT. Here’s a closer look at this year's UK VAT updates.
How did UK VAT penalties change?
On January 1, 2023, HMRC introduced late VAT payment penalties and points-based penalties for late VAT returns. These replace the default VAT surcharge. They apply to accounting periods that begin after January 1, 2023. The new VAT penalties are as follows:
Late submission penalties: You get a penalty point for every VAT return you submit late. When you reach the penalty point threshold, you are charged a £200 penalty. After that, each further late submission incurs another £200 penalty.
Late payment penalties: You must pay a late payment penalty if your VAT payment is more than 15 days overdue. Once it reaches 30 days, the late payment penalty increases. A second late payment penalty is also added.
For more information about the new VAT penalty regime, head over to the HMRC website.
How many penalty points lead to a fine?
The points threshold depends on how often you file. HMRC charges a £200 penalty when you reach it. Each later late return brings another £200 penalty:
- Annual returns: 2 points
- Quarterly returns: 4 points
- Monthly returns: 5 points
At the threshold, points are removed after a period of compliance: 24 months for annual filers, 12 months for quarterly filers and 6 months for monthly filers. You must also have sent all returns due in the previous 24 months. Below the threshold, each point expires on its own after about 24 months.
How are late payment penalties calculated? A worked example
HMRC charges nothing if you pay within 15 days of the due date. After that, the first penalty is a percentage of the VAT still unpaid. From day 31, a second penalty builds up daily.
HMRC’s own example uses a VAT bill of £15,000:
- Paid within 15 days: no penalty.
- Paid between day 16 and day 30: 3% of £15,000, so £450.
- Paid 51 days late: a first penalty of £900 (£450 at day 15 plus £450 at day 30). The second penalty adds £86.30 (£15,000 × 10% × 21 days ÷ 365). The total is £986.30.
Late payment interest is charged on top, from the first day the VAT is overdue until it is paid. It currently runs at the Bank of England base rate plus 4%. See how late payment penalties work on GOV.UK.
How can you avoid or challenge a VAT penalty?
Ask HMRC for a Time to Pay arrangement as early as you can. This is a payment plan agreed with HMRC’s Payment Support Service. Timing matters:
- Asking within the first 15 days avoids the first penalty.
- Asking by day 30 avoids the higher first penalty from day 31.
- Asking on or after day 31 stops the second penalty and interest from growing.
If you break the plan’s terms, HMRC may cancel it and charge both penalties as if it never existed. If you disagree with a penalty, you can ask HMRC for a review or appeal to the tax tribunal. HMRC may cancel a penalty if you had a reasonable excuse.
Which healthcare VAT exemptions were extended?
From May 1, 2023, UK VAT rate exemptions for various healthcare services were extended. They now cover medical services supervised by pharmaceutical staff.
The zero rate of VAT was also extended. It now includes prescription medicines supplied under Patient Group Directions (PGDS).
What does this mean for businesses?
- File every VAT return on time, because each late return adds a point.
- Pay in full within 15 days of the due date to avoid the first late payment penalty. If you cannot pay, contact HMRC as soon as possible.
- If you supply medical services supervised by pharmacy staff, or medicines under PGDs, check that you apply the right VAT treatment from May 1, 2023.
For an overview of UK VAT rates and registration, see our UK VAT guide.
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Frequently asked questions
What are the new UK VAT penalties introduced in 2023?
As of January 1, 2023, HMRC applies a points-based penalty system for late VAT returns and new charges for late payments. Reaching the penalty threshold results in a £200 fine, with further penalties for continued delays.
Which healthcare services are now VAT exempt in the UK?
From May 1, 2023, VAT exemptions were extended to include medical services supervised by pharmaceutical staff, and zero-rated VAT now applies to prescription medicines supplied under Patient Group Directions (PGDs).
How much is the UK late payment penalty for VAT?
Since April 1, 2025, the first penalty is 3% of the VAT owed at day 15, plus 3% of the VAT still owed at day 30. From day 31, a second penalty applies at 10% a year, charged daily.
How many VAT penalty points lead to a fine?
It depends on how often you file: 2 points for annual filers, 4 for quarterly and 5 for monthly. Reaching the threshold triggers a £200 penalty, plus £200 for each later late return.
What is the interest rate on late VAT payments in the UK?
HMRC charges late payment interest at the Bank of England base rate plus 4%. It runs from the first day the VAT is overdue until it is paid in full.
Can a Time to Pay arrangement stop VAT penalties?
Yes, if you ask early enough. Asking within 15 days avoids the first penalty. Asking on or after day 31 stops the second penalty and interest from growing.
How do I appeal a VAT penalty?
You can ask HMRC for a review or appeal to the tax tribunal. HMRC may cancel a penalty if you had a reasonable excuse.
