CH193160 - Penalty reform - penalties for failure to pay VAT on time from 1 January 2023: how late payment penalties work: time to pay agreement
Source: gov.uk (2025-08-07)


NB: “These rules currently only apply to VAT, for VAT periods starting on or after 1 January 2023. These rules will come into force for other tax regimes at a future date. You must check the date from which these rules apply for the tax or duty you are dealing with”

All customers are expected to make payment in full by the due date. If a person is unable to pay by the due date, they can ask HMRC to agree a Time to Pay agreement (TTP).

A (TTP) agreement is an agreement between HMRC and a person that allows an amount of tax due to be paid in instalments.

If a TTP is agreed, this stops late payment penalties applying from the date the proposals for paying the tax were made by the person. For example, no penalty would be payable if the proposals were made by the end of the 15-day period.

If the proposals were made after the 15-day period, the amount of the first penalty will depend on whether the proposals were made before or after the end of the 30-day period.

For periods where the tax is due on or after 31 May 2025, unless the period began before 1 April 2025, this penalty is set at 3%.

For periods where the tax is due on or before 30 May 2025 or for periods that began before 1 April 2025, this penalty is set at 2%.

For periods where the tax is due on or before 30 May 2025 or for periods that began before 1April 2025. If the proposals were made no later than day 30, the first penalty would be limited to 2% first penalty arising at the end of day 15. If TTP is agreed after day 30 the first penalty would be 2% of what was outstanding at day 15 plus 2% of what is still outstanding at day 30.

For periods where the tax is due on or after 31 May 2025, unless the period began before 1 April 2025. If the proposals were made no later than day 30, the first penalty would be limited to 3% first penalty arising at the end of day 15. If TTP is agreed after day 30 the first penalty would be 3% of what was outstanding at day 15 plus 3% of what is still outstanding at day 30.

A second penalty would only be applied if the TTP proposals were made on or after day 31.

For periods where the tax is due on or after 31 May 2025, unless the period began before 1 April 2025, the second penalty is set at 10%.

For periods where the tax is due on or before 30 May 2025 or for periods that began before 1April 2025, the second penalty is set at 4%.

Where a TTP is varied the rules still apply to the varied TTP as if it was the original agreement.

Example- TTP arrangement agreed and kept for a period where the tax is due on or bbefore 30 May or the period began before 1 April 2025.

Customer submitted a VAT return showing that they owed £1,000 VAT. They did not pay any of the VAT by the 30th day after the payment due date so incurred a first late payment penalty of £40 (2% x £1,000 owed at the 15th day + 2% x £1,000 owed at the 30 day).

They have still not paid by the 40th day after the payment due date so has also incurred a second late payment penalty at a rate equivalent to 4% per year. They approach HMRC on the 40th day and agree a schedule for paying off their debt as part of a Time to Pay arrangement.

By proposing a TTP arrangement, they stop the second late payment penalty accruing further.

They pay the full amount of VAT under the terms of the TTP agreement. The second late payment penalty is calculated from the 31st day after the payment due date to the day the proposal was made (the 40th day).

Breaking a TTP

If the person breaks the terms of a TTP agreement, HMRC may cancel that agreement and notify them that a penalty is payable. When this happens the liability for both the first penalty and second penalty will be calculated as if the TTP never had effect.

A TTP agreement is broken if:
- the person fails to pay the deferred amount when the deferral period ends, or
- the deferral is subject to the person complying with a condition and the person fails to comply with it.
Example – TTP arrangement broken for a period where the tax is due on or after 31 May 2025, and the period began before 1 April 2025

Customer owes £1,000 VAT. On the 40th day after the payment due date they propose a TTP arrangement that is agreed by HMRC. They have already been charged a first late payment penalty of £40 because the VAT was not paid by the end of the 30th day.

Under the TTP arrangement they agree to pay £167 each month for 6 months until the £1,000 debt is paid.

Customer pays the first two months’ instalments on time but does make any payment for the 3rd month. This breaks the TTP arrangement.

Customer eventually pays the remaining £666 on the 101st day after the payment due date.

The first late payment penalty of £40 still applies, as nothing was paid within 30 days of the payment due date.

Because Customer broke the TTP arrangement, HMRC charges the second late payment penalty as if the TTP arrangement was never in place. The calculation of the second late payment penalty reflects the actual amounts outstanding until it was paid.

Calculation:

£1,000 outstanding for 10 days (31st to 40th days): £1,000 x 10% x 10/365 = £2.74

plus

£167 paid on day 40 so £833 outstanding for 30 days (41st to 70th days): £833 x 10% x 30/365 = £6.85

plus

£167 paid on day 70 so £666 outstanding for 32 days (71st to 101st days): £666 x 10% x 32/365 = £5.84

Second late payment penalty = £2.74 + £6.85 + £5.84 = £15.43

FA21/SCH26/PARA10(4-6)