If VAT registered businesses do not comply fully with VAT rules and obligations in the UK, they can face financial penalties from HMRC. The main penalties relate to: Late VAT registration – Failure to register on time can attract automatic penalties based on days of delay. Fines can run into hundreds of pounds if unregistered period is significant. Late filing and payment of VAT returns – Delay in filing VAT returns or paying VAT beyond the deadline can lead to penalties. The amounts depend on default history over past 12 months. Inaccurate VAT returns – Careless or deliberate errors in reporting output or input VAT figures can lead to penalties up to 100% of VAT lost. Penalties can be mitigated by voluntarily disclosing errors. VAT evasion – Not paying correct VAT or fraudulent accounting of VAT to gain undue benefit can attract penalties equal to evaded tax, and even criminal prosecution. In addition to penalties, HMRC also charges interest on late payments of VAT, errors in returns, or under declarations of VAT identified during audits. The annual rate of VAT interest is set at 3% above base rate of Bank of England. VAT registered businesses should thus maintain accurate digital records, put proper accounting systems in place, file returns on time and avoid transactions linked to VAT fraud, to stay compliant and avoid penalties.