Research and analysis

Impact of Penalty Reform on VAT Registered Businesses — Quantitative research

Published 26 March 2026

Executive summary 

The VAT penalty reforms, introduced from January 2023, replaced the default surcharge regime with a new system comprising: 

• a points-based penalty for late submissions (LSP) 

• new penalties for late payments (LPP) which depend on how late payment is made. 

This research builds on earlier qualitative research with small businesses in 2024 to provide robust quantitative evidence on awareness, understanding, fairness, trust, and behavioural impacts among VAT registered businesses. Insights from this research will also help shape the forthcoming introduction of MTD for Income Tax, due to be rolled out in stages from April 2026.

Current VAT behaviours 

Most businesses recognised the importance of VAT compliance and aimed to meet their obligations. However, around one in 5 reported difficulties submitting returns (19%) or paying VAT (22%) on time. These challenges were typically practical rather than intentional, arising from cash flow pressures, limited administrative capacity, or competing business priorities. 

Businesses that described their VAT affairs as more complex were also more likely to experience difficulties, suggesting that - could offer additional support to aid compliance, for example, clearer guidance. Qualitative findings from previous research also indicated that most businesses felt compliance was constrained by financial pressures that often took priority over paying VAT on time. 

General awareness and understanding of VAT penalties 

While the vast majority of businesses stated they had at least heard of VAT penalties for late submission or payment (95%), levels of awareness were mixed. Half had a ‘very good’ or ‘good’ understanding of penalties for VAT returns that are submitted late and VAT that is paid late. A further 24% stated they ‘know enough for my business needs’, and a further 21% said they had ‘heard of them, but don’t know the details’.

Despite high levels of awareness, understanding of the 2023 reforms remained mixed. More than half (56%) of businesses said they were ‘a great deal’ or ‘somewhat’ aware that the penalty systems for VAT had changed from January 2023.  Around 2 in 3 said they were aware that penalty points were issued for late VAT submission (68%) and higher penalties for late payment were applied to businesses that pay later (67%). 

Knowledge of procedural aspects, such as the appeals system, were also mixed. Around half of businesses (51%) stated they knew about the online appeals process to appeal any penalties that had been received. 

Perceptions that having better understanding of VAT penalties would increase the likelihood of meeting VAT return or payment deadlines were low. Fewer than half of businesses (46%) felt that having an improved understanding of VAT penalties would make them ‘a great deal’ or ‘somewhat’ more likely to meet VAT deadlines. This aligns with previous qualitative research that found businesses felt non-compliance was not due to lack of knowledge or understanding, but that it was mainly caused by factors outside of their control, for example cash flow issues. Improving understanding of VAT penalties was therefore not seen to be helpful for increasing compliance with deadlines and consequently became less of a priority for businesses. 

Experiences with VAT penalty reforms 

Among businesses that received penalty points or financial penalties, almost two-thirds (62%) experienced difficulties in relation to the penalty. Where businesses experienced difficulties, they were most likely to report information related difficulties such as knowing where to go for more information or support (34%) or understanding why they received a penalty (34%). One third of businesses (32%) reported difficulties understanding how to appeal the penalty (32%). Other practical difficulties were experienced by around a quarter of businesses, for example knowing how much they needed to pay (28%) or knowing how and where to make a payment (26%). 

Awareness of the appeals process was limited and experiences were mixed. Fewer than one in 6 (16%) businesses that had received a penalty had used the appeal process. The qualitative research conducted by Verian on the same subject also reported low awareness and uptake of the appeals process among small businesses. Findings from that research revealed that businesses assumed the process would be laborious, unproductive, and therefore not worth exploring. These challenges suggest that awareness and perceived ease of use, rather than willingness, were the main barriers to engagement. It is worth noting that not all penalties would be expected to lead to an appeal, as some businesses may acknowledge that their penalty was justified and would therefore not seek to challenge it.

Perceptions of fairness and trust 

The points-based system for late submissions was generally viewed as fairer and more proportionate than the former default surcharge regime. Over half of businesses (55%) said the reformed approach was more equitable and only one in 5 (22%) said they preferred the old system. Businesses appreciated that the new approach differentiated between occasional administrative errors and persistent non-compliance, allowing them to correct behaviour before financial penalties were applied. The qualitative research conducted in 2024 supported these findings, with businesses generally welcoming the changes in regard to late submission penalties. Participants valued the perceived leniency of the system, regarding it as a proportionate approach trying to target repeated non-compliance. 

However, perceptions were less positive for late payment penalties. Over half of businesses (52%) felt the old system was fairer compared with 31% who favoured the new regime. The reforms appeared to have had limited impact on trust in HMRC. Around 4 in 5 (80%) businesses reported that their level of trust had not changed since the reforms, while about one in 10 said it had either increased (8%) or decreased (10%).

Impact of VAT penalty reform on behaviour change 

The introduction of penalty points for late submissions and escalating fines for late payment were reported to prompt some improvements in compliance behaviour, although the overall impact appeared modest. Financial penalties for late payment appeared to be more effective at driving behaviour change than one-off late submission penalties or penalty points, likely due to the immediate and tangible financial consequences. This suggests that the perceived immediacy and visibility of financial consequences may play a key role in motivating compliance. Strengthening communication around the link between prompt payment and avoiding daily penalty increases could reinforce deterrence. 

Many businesses said that the risk of reaching a penalty threshold for late submission had made them more attentive to submission deadlines, while the threat of daily increasing late payment penalties encouraged timelier VAT payments. Some reported taking proactive steps, such as setting reminders, adjusting internal processes, or consulting accountants, to avoid future penalties.

Introduction

Background and context

Penalty Reform (PR) is HMRC’s strategic direction for Late Submission Penalties (LSPs) and Late Payment Penalties (LPPs). Under the previous system, each missed submission deadline resulted in immediate financial penalties which escalated if the return remained unsubmitted (daily, 6 and 12 month). PR replaced this from January 2023 with a points-based system for missed deadlines, with financial penalties only being issued once a points threshold is reached. PR forms part of the Making Tax Digital (MTD) initiative, which seeks to deliver whole system change to the administration of VAT and Income Tax. The reformed penalty frameworks provide the sanctions for MTD and support HMRC’s broader goal of maintaining taxpayer confidence through fair treatment and protecting the integrity of the tax system.

VAT was the first tax to move to the new penalty regimes. The new VAT late submission and late payment penalties, along with updated interest rules on late payments and overpayments, were implemented from January 2023 and now affect around 2.4 million VAT registered businesses. It therefore provides an important test case for whether penalty reform is achieving its intended outcomes. Insights from this research will also help shape the forthcoming introduction of MTD for Income Tax, due to be rolled out in stages from April 2026. 

Research objectives

Prior to this research, Verian carried out qualitative research in 2024 with 48 VAT registered small businesses to explore initial reactions to the VAT penalty reforms. This quantitative research was commissioned by HMRC to measure the wider impact of the late submission and late payment penalty regimes introduced from January 2023, focusing on key themes of awareness, understanding, fairness, and trust. 

In addition to gauging perceptions among the broader business population, the research examines the experiences of those directly affected by the reforms and any resulting changes in reported behaviour. An overview of the research questions and survey topics is provided in each chapter. 

The findings of this research will contribute to HMRC’s broader evaluation of the penalty reforms.

Research methodology

The population of interest for this research comprised all businesses within the scope of the reformed VAT penalty regimes. The reforms apply to VAT registered businesses in respect of accounting periods beginning on or after 1 January 2023. All active VAT registered businesses were therefore within scope, regardless of turnover, including those operating below the VAT threshold. 

The survey questionnaire was designed collaboratively between HMRC and Verian. The questions were cognitively tested, and a pilot survey was conducted prior to the full launch. 

A telephone survey of VAT registered businesses generated a representative sample of the population, where 1,202 interviews were completed in total. As per Table 2.1 the sample was stratified by 3 turnover bands, and a disproportionate sample design was implemented to slightly boost the representation of larger businesses and enable robust analysis of this group. 

Table 2.1: Fieldwork figures

Categories	Number of interviews
Total Interviews	1,202
Unknown turnover	55
Less than £85k	390
£85k to £300k	371
Over £300k	386

Telephone interviews were carried out with the named contact drawn from HMRC’s administrative data. Referrals to tax agents or others who were not the named customer were not accepted. Interviews lasted around 20 minutes on average. Fieldwork took place between 16 June and 22 July 2025.

Reporting conventions 

The following points should be considered when reading this report: 

• percentages for single response questions do not always add up to exactly 100% because of rounding 

• the sum of 2 or more percentages does not always equal the sum of the integers because of rounding 

• all subgroup differences reported are statistically significant to the 95% confidence level, which means that we can be 95% confident that the differences observed are genuine differences and have not occurred by chance 

• base sizes for each result reported are shown with the charts. Any base sizes of fewer than 100 should be interpreted with caution and the findings viewed as indicative 

• where -% is shown in data tables, this indicates that no respondents selected this option code 

Current VAT behaviours 

Summary

This section explored how businesses approached their VAT obligations, including the importance they placed on compliance with VAT submission and payment deadlines, their perceived ability to meet VAT deadlines, and the factors that helped or hindered timely submission and payment. These questions were designed to establish a behavioural baseline, understanding how businesses managed VAT in practice, what drives or constrains compliance, and the extent to which issues such as cash flow, administrative capacity, or system complexity influence their ability to comply. 

This context helped interpret the impact of the new penalty regimes by identifying whether non-compliance reflects deliberate behaviour, capability challenges, or barriers within the VAT system. The research found that businesses understood the importance of meeting VAT deadlines, but a notable proportion were not always able to do so. Cash flow issues were the biggest barrier preventing some businesses from meeting deadlines.

Importance of meeting VAT submission and payment deadlines

Overall, the majority of businesses responded saying they placed high importance on submitting their VAT return and making their VAT payment by the deadlines. As shown in Table 3.1, around 9 in 10 businesses said meeting submission (91%) and payment (90%) deadlines for VAT were ‘very important’ to them.

Table 3.1: Importance of meeting VAT submission and payment deadlines

Importance of meeting VAT submission and payment deadlines	Submitting your VAT return by the deadline	Making your VAT payment by the payment deadline
1 – Not at all important	1%	1%
2	0%	0%
3	2%	2%
4	5%	5%
5 – Very important	91%	90%
Don’t Know	0%	1%

Source: Q2 How important is each of the following to your business? Please rate on a scale where 5 is very important and 1 is not at all important… Base: All businesses (n = 1,202)

Businesses that had a ‘very good’ or ‘good’ understanding of VAT penalties (Table 4.1) were more likely than those who had a limited understanding to feel it was ‘very important’ to meet submission deadlines (93% compared with 87%) and payment deadlines (93% compared with 86%). This implies a relationship between knowledge and perceived importance of compliance and may indicate that increasing awareness could reinforce the perceived significance of compliance. 

However, the importance placed on meeting VAT submission and payment deadlines decreased among businesses that had been issued with various types of VAT penalties. There was a lower reported importance placed on VAT submission deadlines among businesses that had received: 

• late submission penalty points (86%) compared with those that had not (94%) 

• late submission penalty charge (65%) compared with those that had not (92%) 

• first late payment penalty (84%) compared with those that had not (92%) 

• second late payment penalty (83%) compared with those that had not (92%) 

• late payment interest (88%) compared with those that had not (93%) 

This could suggest that penalties may not be having the intended deterrent effect for some, and that HMRC may need to consider how penalties are framed or communicated to reinforce their purpose rather than create disengagement. While this may indicate that penalties are not always acting as an effective deterrent, it could equally reflect that businesses which place lower importance on VAT compliance are naturally more likely to miss deadlines and incur penalties.

Control over meeting VAT deadlines on time

When thinking about perceived control over meeting VAT submission and payment deadlines, most businesses felt they were ‘always able to meet the deadline if we want to’ for VAT return deadlines (80%) and VAT payment deadlines (76%). However, one in 5 businesses were either ‘sometimes able to meet the deadline, but it depended on the circumstances’ or were ‘unable to meet the deadline due to factors outside their control’ for VAT return deadlines (19%) and VAT payment deadlines (22%) (Figure 3.1).

These findings suggest that while most businesses felt able to manage their VAT obligations, a notable minority experienced barriers that limited their sense of control. For some, these challenges may be linked to the perceived complexity of HMRC’s systems, processes, or guidance. For others, they likely reflect internal business factors such as limited administrative capacity, reliance on manual bookkeeping, or competing operational pressures. This highlights the value of continued support to help businesses navigate VAT requirements more easily, particularly reducing any external pressures caused by the complexity of HMRC’s requirements or systems. 

Figure 3.1: Perceived control over meeting VAT deadlines on time

Response	VAT return deadlines	VAT payment deadlines
Don’t know	0	1
Unable to meet deadline	2	3
Sometimes able to meet deadline	17	19
Always able to meet deadline	80	76

Source: Q5 How much does your business feel in control of meeting each of the following VAT deadlines on time? Base: All businesses (n = 1,202)

Businesses that had a limited understanding of VAT penalties were more likely to say they were only sometimes able to meet VAT return (21%) or VAT payment (24%) deadlines, compared with those that have at least a good understanding (13% and 16%, respectively). Likewise, businesses that perceived their VAT affairs to be complex were more likely to say they were only sometimes able to meet the deadlines for VAT submission (20%) and VAT payment (28%), compared with those who perceived their VAT affairs to be less complex (15% and 17%, respectively). When self-reporting complexity of VAT affairs, businesses may have considered a wide range of aspects of VAT, rather than considering complexity of HMRC processes including submission and payment.

As shown in the findings above, perceived capability and complexity play an important role in shaping the extent to which businesses felt able to meet deadlines. Businesses that better understood the VAT penalty systems appeared to feel more in control of meeting deadlines, while those with more complex VAT affairs were less confident in doing so. However, the direction of this relationship was unclear. Businesses already confident in managing their VAT affairs may also be more motivated to understand the penalties, while those struggling to meet deadlines were less inclined or able to engage with them. 

In practice, improving specific understanding of VAT submission and payment penalties may require clearer guidance and signposting within HMRC’s digital systems. Reducing procedural complexity may make it easier for businesses to manage VAT deadlines consistently and confidently.

Motivations to submitting and paying VAT returns on time

An important area of focus for the research was exploring drivers of compliance with VAT requirements. When thinking about the factors that help or motivate businesses to comply with paying and submitting their VAT return on time, the most common motivation or support was ‘understanding of the VAT penalty systems and consequences of non-compliance’ (28%) (Figure 3.2). This was followed by concern about receiving financial penalties for repeatedly late VAT payments (21%), receiving financial penalties for repeatedly late VAT returns (16%), and receiving penalty points for late VAT returns (14%). This points to an opportunity for HMRC to communicate not just rules, but also positive incentives or clear benefits of compliance.

However, around a quarter of businesses (24%) stated nothing helped or motivated them to comply with paying and submitting VAT on time. This builds on the previous qualitative research with small businesses that found that many participants believed their non-compliance was caused by factors outside of their control, for example due to cash flow issues.

Figure 3.2: Motivations to submitting and paying VAT returns on time

Motivation	%
Understanding VAT penalty system	28
Concern about late payment penalties	21
Concern about repeated late return penalties	16
Concern about penalty points	14
Reminders	12
Advice from accountant	8
Concern about interest	5
Clear HMRC guidance	4
Access to deadline information	3
Direct HMRC support	3
VAT repayment expected	3
Other	6
Don’t know	1
None	24

Source: Q3 What, if anything, helps or motivates your business to comply with paying your VAT, and submitting your VAT return on time? Base: All businesses (n = 1,202). Note: The list of option codes was unprompted, and interviewers used a set list of potential options depending on how businesses responded.

Barriers to submitting and paying VAT returns on time

Additionally, the research also explored factors that made it difficult for businesses to comply with VAT requirements. When thinking about what made it difficult to comply with paying and submitting their VAT return on time, financial difficulties due to ‘cash flow issues or lack of available funds’ (16%) were the most common barrier for businesses (Figure 3.3). This was followed by businesses being too busy (9%) and delays with an accountant, bookkeeper and/or accountancy software (8%). However, over half of businesses (52%) stated they felt nothing made it difficult for them to comply with paying and submitting VAT on time.

Figure 3.3: Barriers to submitting and paying VAT returns on time

Barrier	%
Cash flow issues / lack of funds	16
Business too busy	9
Delays with accountant/bookkeeper/software	8
Delays receiving supplier information	6
Limited internal capacity	4
Software / internet issues	3
Competing business priorities	2
Uncertainty on allowable expenses	2
Other	6
Don’t know	1
None	52

Source: Q4 What, if anything, makes it difficult for your business to comply with paying your VAT, and submitting your VAT return on time? (n = 1,202). Note: The list of option codes was unprompted, and interviewers used a set list of potential options depending on how businesses responded. 

These findings that financial issues were a barrier to compliance with VAT payment and submission deadlines support insights from the qualitative research conducted by Verian in 2024. Businesses felt non-compliance with VAT obligations was often due to other financial pressures, such as paying staff and suppliers. These demands often took priority over paying VAT on time and therefore resulted in non-compliance, suggesting that penalty reform alone may have limited behavioural impact without parallel financial or administrative support mechanisms.

Certain subgroups of businesses were more likely to report cash flow issues making it difficult to comply, including businesses that: 

• outsourced their VAT activities to external agents (22% compared with 13% for those that conducted these affairs internally) 

• had a limited understanding of VAT penalties (19% compared with 13% for those that have at least a good understanding) 

• perceived their VAT affairs to be complex (21% compared with 14% for those whose VAT affairs are not complex) 

General awareness and understanding of VAT penalties

Summary 

This section examined how well businesses understood the VAT penalty systems for late submission of VAT returns and for late payment of VAT returns, and their awareness of the changes introduced from January 2023. The questions explored both general familiarity with VAT penalties and detailed awareness of specific aspects such as penalty points, late payment charges, and the appeals process. The aim was to assess whether businesses clearly understood how penalties were triggered and how to remain compliant, as well as to test the effectiveness of HMRC’s communication and guidance in supporting that understanding. 

These insights helped identify whether gaps in awareness are limiting compliance or perceptions of fairness within the reformed systems. Key findings uncovered that most businesses had some understanding of the VAT penalty systems. However, many were not aware that the systems had changed from 1st January 2023. A majority of businesses agreed that HMRC provides clear and accessible guidance. However, some felt that a better understanding of the penalties would make them more likely to comply. 

Understanding of VAT penalties for late submission and payment 

Gauging general understanding of the VAT penalty systems was a key objective of the research. While the vast majority of businesses stated they had at least heard of VAT penalties for late submission or late payment (95%), levels of understanding were mixed. Half of businesses (50%) had a ‘very good’ or ‘good’ understanding of penalties for VAT returns that are submitted late and VAT that is paid late. A further 24% stated they ‘know enough for my business needs’, 21% saying they had ‘heard of them, but don’t know the details’ and 5% that reported that they ‘don’t know anything about them’. 

This lack of detailed awareness may mean many businesses were unclear on how new penalties are triggered, which could limit both deterrence and perceptions of fairness. Strengthening communications to make penalty rules clearer and more visible could help businesses better understand when and why penalties apply. This may be particularly effective within HMRC’s existing digital touchpoints, such as VAT return reminders or online guidance. Greater clarity may also reinforce trust by ensuring businesses see the systems as transparent and proportionate.

Table 4.1: Understanding of VAT penalties

Self-reported understanding of VAT penalties for late submission and payment	% of Businesses
I don’t know anything about them	5%
I’ve heard of them, but don’t know the details	21%
I know enough for my business needs	24%
I have a good understanding	30%
I have a very good understanding	20%
Don’t Know	0%

Source: Q6 HMRC apply penalties for VAT returns that are submitted late and VAT that is paid late. How would you rate your understanding of these VAT penalties? Base: All businesses (n = 1,202)

Businesses that stated they had heard of VAT penalties but didn’t know the details, were more likely to have received a first late payment penalty (27% compared with 20% for those that had not) or a second late payment penalty (34% compared with 20% for those that had not). This was also more likely among businesses that outsourced all their VAT activities (27% compared with 15% for those that handled this internally).

This pattern likely reflected differences in engagement with VAT processes. Businesses that had received late payment penalties may have become aware of penalties through direct experience, but without fully understanding the underlying rules or changes introduced in 2023. Similarly, those that outsourced all VAT activities may have relied on their agents to manage compliance, reducing the need or incentive to understand the penalty details themselves. 

Awareness of changes to the VAT penalty systems

Moving beyond general understanding, businesses were also probed on their awareness of changes to the VAT penalty systems that entered into effect from 1 January 2023 (Table 4.2). Over half of businesses (56%) were at least ‘somewhat’ aware of the changes to the VAT penalty system, whilst a third (33%) said they were not at all aware of the changes.

Table 4.2: Awareness of changes to the VAT penalty system 

Extent to which businesses were aware of changes to the VAT penalty systems	% of Businesses
Not at all	33%
Not very	10%
Somewhat	25%
A great deal	30%
Don’t Know	1%

Source: Q8 To what extent were you aware that the consequences for late submission or payment of VAT returns changed from 1 January 2023? Base: All businesses (n = 1,202)

Certain subgroups of businesses were more likely to state they had no awareness at all of the VAT penalty changes. This was more likely among businesses that outsourced their VAT affairs to external agents (41% compared with 27% for those that conducted VAT affairs internally) and among businesses that had not received late submission penalty points (36% compared with 26% for those that had received them).

Lower awareness among businesses using external agents likely reflected their reliance on intermediaries to manage compliance on their behalf, meaning they were less directly engaged with HMRC guidance or communications about policy changes. Meanwhile, the lower awareness among those without penalty experience suggests that direct exposure to the new systems was a key driver of understanding. Awareness often appeared to stem from receiving a penalty rather than from proactive information-seeking or communication from HMRC. Together, these findings highlight the importance of engaging both intermediaries and businesses without prior penalty experience to strengthen awareness and understanding of the VAT penalty regimes across the wider population. 

Awareness of different aspects of the VAT penalty systems 

Exploring awareness of the new VAT penalty systems in further detail, businesses were provided with a list of features of the new systems and asked to select which, if any, they were aware of. Over 9 in 10 businesses (93%) reported being aware of at least one feature of the new VAT penalty systems, with just 6% having no awareness of any features (Figure 4.1). Looking closer at reported awareness, 4 in 5 businesses (80%) claimed to know that late payments were subject to interest. Around 2 in 3 said they were aware that penalty points were distributed for late VAT submission (68%) and higher penalties for late payment were applied to businesses that pay later (67%). Around half of businesses (51%) also stated they knew about the online appeals process to appeal any penalties that had been received and that HMRC pay interest on amounts owed to businesses (45%).

Figure 4.1: Awareness of different aspects of the VAT penalty systems

Feature	% aware
Late payments subject to interest	80
Penalty points for late submission	68
Higher penalties for late payment	67
Online appeals process	51
HMRC pays interest owed	45
None	6

Source: Q9 Which of the following aspects of the VAT penalty system are you aware of (if any)? Base: All businesses (n = 1,202) 

Lower awareness for the appeals process was also reflected in the qualitative research conducted by Verian in 2024. The qualitative study found limited awareness and use of the appeals process, with many businesses assuming that submitting an appeal would be time consuming and have low chances of success, and therefore not be worth pursuing. HMRC may need to simplify or promote digital support channels more clearly to improve awareness and use of the appeals system.

Awareness of ‘penalties for late submission, involving penalty points’ was higher among businesses that handled all their VAT activities internally (77% compared with 57% for those that outsourced this). Similarly, awareness of the ‘online appeals process where you can appeal penalties’ was higher among businesses that conducted all their VAT activities internally (59% compared with 44% for those that manged this externally) and were newly VAT-registered in the last 4 years (55% compared with 48% for those registered 10 years or more). 

These findings likely reflected the closer, hands-on engagement that businesses managing VAT internally had with HMRC systems and communications. By directly handling their own VAT processes, these businesses were more likely to encounter information about penalties and the appeals process first-hand, rather than relying on intermediaries to manage compliance on their behalf. In contrast, those that outsourced VAT activities may have depended on their agents to interpret and act on HMRC updates, meaning they were less exposed to the details of the reforms. Newly registered businesses, meanwhile, are likely to have encountered information about the reformed penalty systems during registration or onboarding, whereas longer-established businesses may be relying on outdated knowledge from before the reforms. Together, these findings suggest that intermediaries and new registrants are important channels for reinforcing awareness and understanding of VAT penalties. 

Likelihood that a better understanding of VAT penalties would increase compliance 

The research also explored whether there was a link between better understanding of VAT penalties and increased likelihood to meet VAT return or payment deadlines (Table 4.3). Almost half of businesses (46%) felt that having a better understanding of how VAT penalties work would make them at least ‘somewhat’ more likely to meet VAT deadlines. This aligns with findings in Figure 3.2 indicating that understanding of the penalty systems and consequences of non-compliance was a motivator to timely submission and payment of VAT. 

Table 4.3: Impact of better understanding of VAT penalties on likelihood to meet VAT deadlines

Extent to which having a better understanding of VAT penalties would make their business more likely to meet VAT deadlines	% of Businesses
Not at all	37%
Not very	12%
Somewhat	20%
A great deal	26%
Not applicable	4%
Don’t Know	1%

Source: Q7 To what extent do you think that having a better understanding of how VAT penalties work would make your business more likely to meet VAT return or payment deadlines? Base: All businesses (n = 1,202) 

Businesses with limited understanding of VAT penalties (40%) and those unaware of changes to the VAT penalty systems (49%) were more likely to say improved understanding had no impact on meeting VAT deadlines, compared with those who were better informed (32% and 33% respectively).

Almost half of businesses (49%) felt that improving their understanding of VAT penalties would have limited impact on their likelihood of meeting deadlines. These insights were also reflected through the previous qualitative research on VAT penalty reforms. Businesses felt that non-compliance was mainly caused by factors outside of their control, for example due to cash flow issues. Therefore, improving understanding of VAT penalties alone would not help improve compliance with deadlines and consequently became less of a priority for businesses.

Agreement that HMRC provide clear and easy to find guidance 

Related to gauging the impact understanding of VAT penalties for late submission or late payment of VAT returns had on compliance, the research asked businesses about the effectiveness of HMRC’s communication and guidance in supporting understanding of VAT return and payment requirements (Table 4.4). Over half of businesses (55%) strongly or somewhat agreed with the statement, ‘HMRC provide clear and easy to find guidance on how my business can remain compliant with VAT return and payment requirements’. 

Table 4.4: Agreement that HMRC provide clear and easy to find guidance 

Level of agreement that HMRC provide clear and easy to find guidance	% of Businesses
Strongly disagree	8%
Somewhat disagree	9%
Neither agree nor disagree	26%
Somewhat agree	34%
Strongly agree	22%
Don’t Know	1%

Source: Q14 To what extent do you agree or disagree with the following statement?

HMRC provide clear and easy to find guidance on how my business can remain compliant with VAT return and payment requirements. Base: All businesses (n = 1,202) 

Certain subgroups of businesses were more likely to agree that HMRC provide clear and easy to find guidance, including businesses that: 

• had an annual turnover of £300,000 or more (62% compared with 54% for those with an annual turnover less than £85,000 and 50% for those with an annual turnover of £85,000 to 300,000) 

• had at least a good understanding over VAT processes (63% compared with 40% for those with limited understanding) 

• had better awareness of changes to the penalty systems (68% compared with 42% for those with no awareness) 

• had less complex VAT affairs (58% compared with 48% for those who perceived their VAT affairs to be complex) 

This indicates that while most businesses agree HMRC’s guidance is clear, this is linked with already having good awareness and understanding of VAT penalties. Those smaller, lower turnover businesses that likely require more support are less likely to agree, potentially highlighting communication gaps.

Experiences with VAT penalty reforms

Summary 

This section explored the experiences of businesses that had received penalties for late submission or late payment under the reformed VAT systems. The questions sought to understand the types of difficulties businesses faced when interacting with HMRC after receiving a penalty, including clarity of communication, understanding of the appeals process, and ease of paying penalties. Respondents were also asked whether they had appealed their penalty points or financial penalties, to assess use of the appeals process. 

These insights provided a practical perspective on how the reforms were operating in practice, highlighting where businesses may require clearer information, better digital support, or simpler processes. The research showed that the most common difficulties experienced by businesses when receiving a penalty were knowing where to go for more information, understanding why the business had received the penalty and understanding how to appeal. 

Difficulties experienced by businesses when receiving a VAT penalty

The research aimed to understand the types of difficulties businesses faced when interacting with HMRC after receiving a penalty. Almost two-thirds of businesses that received penalty points or financial penalties had experienced at least one difficulty (62%), whilst 37% did not experience any difficulties during the process of receiving a penalty (Figure 5.1). 

Where businesses experienced difficulties, they were most likely to report information-related difficulties such as where to go for more information or support (34%) or understanding why they received a penalty (34%).

Businesses also experienced practical difficulties during the process of receiving penalties, with one third of businesses (32%) reporting difficulties understanding how to appeal the penalty. Around a quarter of businesses experienced difficulties knowing how much they needed to pay (28%), knowing how and where to make a payment (26%) and arranging a time-to-pay agreement (23%). 

These findings suggest that limited awareness of the systems and uncertainty around how to navigate it were the main barriers to taking action after receiving a penalty. To address this, HMRC could focus on improving the clarity and accessibility of penalty communications, ensuring that businesses receive straightforward explanations of the reasons for penalties, next steps, and appeal options. Enhanced signposting to online guidance and continually improving user-friendliness of digital tools could also help reduce confusion and make the process of addressing penalties quicker and more transparent. 

Figure 5.1: Difficulties experienced when receiving a penalty from HMRC

Difficulty	%
Knowing where to get information	34
Understanding reason for penalty	34
Understanding how to appeal	32
Knowing amount to pay	28
Knowing how/where to pay	26
Arranging time-to-pay	23
Other	7
No difficulties	37

Source: Q19 Thinking about your experience receiving a VAT penalty from HMRC, did you experience any of the following difficulties? Base: Businesses that reported receiving penalty points and (or) financial penalties (n = 386). Note percentages may sum to more than 100% due to multi-coding. 

Businesses that outsourced all their VAT activities were more likely to experience practical barriers to take appropriate actions, including: 

• knowing how much needed to be paid (38% compared with 24%) 

• knowing how and where to make a payment (36% compared with 21%) 

• understanding how to appeal the penalty (40% compared with 25%)

Appealing penalty points and financial penalties

To assess use of the appeals process, businesses that received penalties for late submission or late payment were asked whether they appealed the points or the financial penalties (Table 5.1). The majority of businesses did not appeal against their penalty points (82%) or their financial penalties (80%). The likelihood of businesses appealing penalties was the same across those who had received penalty points and those who had received financial penalties, with 16% saying they had appealed these. It is worth noting that not all penalties would be expected to lead to an appeal, as some businesses may acknowledge that their penalty was justified and would therefore not seek to challenge it. 

Table 5.1: Whether appealed penalty points and financial penalties

Whether appealed each type of penalty	% of Businesses that have received penalty points	% of Businesses that have received financial penalties
Yes	16%	16%
No	82%	80%
Don’t know	2%	4%

Source: Q20_1 Did you appeal against your…penalty points? Base: Businesses that reported receiving penalty points (n = 284). Q20_2 Did you appeal against your…financial penalty? Base: Businesses that reported receiving financial penalties (n = 229). Note: Combined percentages may not add up due to rounding. 

There were some differences in the types of businesses that appealed against financial penalties. Among businesses that reported receiving a penalty, those that handled all their tax work in house were more likely to have appealed financial penalties (21% compared with 9% that outsource tax work to an agent). The following types of businesses that received a penalty were more likely to say they had not appealed financial penalties: 

• businesses VAT registered for more than 10 years (89% did not appeal compared with 74% among those registered for less than 4 years) 

• smaller businesses (88% of businesses with one to 10 employees compared with 52% with 50 or more employees) 

The qualitative research conducted by Verian on the same subject also reported low awareness and uptake of the appeals process among small businesses. Findings from this research also revealed that businesses assumed the process would be laborious, unproductive, and therefore not worth exploring.

Perceptions of fairness and trust 

Summary 

This section explored how businesses perceived the fairness and proportionality of the reformed VAT penalty systems, and whether these perceptions influenced their overall trust in HMRC. Respondents were asked to compare the old and new systems for both late submission and late payment, assessing which they considered fairer. The questions also examined attitudes towards different elements of the penalty design, including the consistency of treatment across different taxes. 

Understanding perceptions of fairness and transparency is critical, as these factors are likely to influence voluntary compliance and trust in the VAT systems more broadly. Overall, businesses tended to agree with the principles of the new VAT penalty systems. However, the new penalty systems had limited impact on businesses’ levels of trust in HMRC. After hearing short descriptions of the old and new systems, businesses generally viewed the new systems as a fairer way of penalising late submission, but a less fair way of penalising late payment. 

Attitudes to penalties for missing VAT deadlines

Businesses were asked about the extent to which they agreed or disagreed with a range of statements describing the principles of the new systems of penalties for missing VAT deadlines (Figure 6.1). The statements examined attitudes towards different elements of the penalty design including the proportionality of the penalties and consistency of treatment across different taxes. 

Overall, there were high levels of agreement with the different elements of the new VAT penalty systems. Four in 5 businesses agreed that businesses who only occasionally miss the deadline should not have to pay penalties (64% rated this statement as 5 ‘strongly agree’ and 15% as 4 ‘agree’). Over two-thirds of businesses agreed that businesses who pay very late should receive higher penalties than those who only pay slightly late (44% ‘strongly agreed’ and 24% ‘agreed’) and over half agreed that businesses that repeatedly miss deadlines should receive a higher penalty (39% ‘strongly agreed’ and 19% ‘agreed’). Businesses were least likely to agree that VAT return and payment penalties should be consistent with the penalties for other taxes, however over half of businesses still agreed with this statement (35% ‘strongly agreed’ and 20% ‘agreed’).

Figure 6.1: Agreement with statements about penalties for missing VAT deadlines 

Statement	Strongly agree	Agree	Neutral	Disagree	Strongly disagree	Don’t know	Total
Occasional late filers shouldn’t be penalised	64	15	10	4	6	1	100
Very late payers should pay higher penalties	44	24	17	6	9	1	100
Repeat offenders should receive higher penalties	39	19	21	7	14	1	100
Penalties should be consistent across taxes	35	20	26	6	10	4	100

Source: Q10 To what extent do you agree or disagree with the following statements about penalties for missing VAT deadlines. Please rate on a scale where 5 is strongly agree and 1 is strongly disagree. Base: All businesses (n = 1,202). Note: Combined percentages may not add up due to rounding.

The qualitative research conducted in 2024 supported these findings, with businesses generally welcoming the changes in regard to late submission penalties. Participants valued the perceived leniency of the systems, regarding it as a proportionate approach trying to target repeated non-compliance.

Agreement was generally high across different business types for most statements. 

When considering whether repeatedly missing VAT return and (or) payment deadlines should warrant a higher penalty there were some differences. Agreement (rating of 4 or 5) was higher among businesses that manage VAT affairs internally (61%) than among those using external providers (52%). Agreement was also higher among businesses with less complex VAT affairs (62%) compared with businesses with complex VAT affairs (48%). 

Perceived fairness of the new penalty systems for late submission and late payment

To better understand business perceptions of the fairness of the new penalty systems in comparison to the old penalty system, descriptions of both systems were prepared, outlining the specifics of the systems and read to participants for consideration. After hearing details, businesses tended to consider the new system fairer for penalising late submission (the full descriptions of the systems can be found in the Glossary of this report). As shown in Table 6.1, more than half of businesses felt that the new penalty system was fairer (55%), with around one in 5 saying they felt the old system was fairer (22%) or that the systems were equally fair (20%). 

Table 6.1: Perceptions of fairness of the new versus old penalty systems for late submission 

Late submission penalty systems	% Respondents
New system fairer	55%
Both systems equally fair	20%
Old system fairer	22%
Don’t know	3%
Refused	1%

Source: Q11 Now, I am going to describe two different VAT penalty systems and how they penalise late submission. After hearing both, please tell me which you believe is the fairer system. Base: All businesses (n = 1,202). Note: Combined percentages may not add up due to rounding. 

Businesses who carried out all VAT work internally (59%) were more likely to view the new system as fairer, compared with those who outsource any VAT work to an agent (52%) or outsource all work (50%). 

These findings indicate that the new points-based system had broadly achieved one of its policy aims of creating a fairer, more proportionate approach to late submission penalties. Similar insights were gained in the previous qualitative research, in which participants perceived late submission points as more lenient and with a greater emphasis on targeting repeat offenders, compared to the old system. The perception that the system better distinguished between one off and repeat offenders may help to reinforce a sense of fairness and legitimacy among businesses, particularly those managing VAT internally. However, the lower perceptions of fairness among those using external agents may indicate that understanding the rationale behind the system may still need strengthening through clearer communication and guidance. 

Perceived fairness of the new penalty system for late payment 

Perceptions of fairness were less positive regarding the late payment elements of the new system. When considering the descriptions of the old VAT payment penalty versus the new system of penalties and interest (the full descriptions of these systems can be found in the Glossary of this report), more than half of businesses felt that the old system was fairer (52%) compared to the newer system (31%) (Table 6.2). 

Table 6.2: Perceptions of fairness of the new versus old penalty systems for overdue payment 

Late payment systems	% Respondents
New system fairer	31%
Both systems equally fair	13%
Old system fairer	52%
Don’t know	4%
Refused	1%

Source: Q12 And now, I am going to describe two different VAT penalty systems and how they penalise late payment. After hearing both, please tell me which you believe is the fairer system. Base: All businesses (n = 1,202). Note: Combined percentages may not add up due to rounding.

Businesses that had been VAT registered for 10 years or more (54%) or 5 to 9 years (56%) were more likely to view the old system as fairer (compared with those registered for less than 4 years (47%). Businesses with a larger turnover were also more likely to view the old system as fairer (55% among businesses with a turnover of more than £300,000 or 56% with a turnover of £85,000 up to £300,000 compared with 47% among those with a turnover of less than £85,000). 

In contrast to views of the new late submission regime, the less positive views of the new late payment system indicate that the reforms had not fully addressed perceptions of fairness in this area. The increasing nature of penalties may be viewed as overly punitive by businesses already facing cash flow pressures. This also aligned with the earlier qualitative research, which showed that perceptions of unfairness around late payment penalties were stronger among businesses that felt they lacked control over their circumstances. For these businesses, receiving a penalty while already struggling with cash flow issues often felt like an added burden, with some feeling that the grace period was too short to accommodate temporary financial difficulties. These findings may outline the importance of continued communication about how penalties are applied and how time-to-pay arrangements may be able to stop late payment penalties increasing. In turn, this could help to mitigate perceptions of unfairness among businesses struggling to meet VAT payment deadlines.

Extent to which the new penalty systems for late submission or payment of VAT returns impacted levels of trust in HMRC 

A key aim of the research was to gauge whether the new penalty systems for late submission and payment of VAT had impacted levels of trust in HMRC. Generally, businesses felt that the new VAT penalty systems had limited impact on their level of trust, with 4 in 5 saying that it made no difference (80%) (Table 6.3). While the reforms were not perceived to have damaged trust in HMRC, they also had done little to actively strengthen it. This may highlight further need to improve understanding and communication around the purpose and fairness of the new systems. 

Table 6.3: Effect of changes to the VAT penalty systems on businesses’ level of trust in HMRC 

The new penalty systems have …	% Respondents
…increased my trust in HMRC	8%
…made no difference	80%
…decreased my trust in HMRC	10%
Don’t know	1%
Refused	0%

Source: Q13 To what extent has the new penalty system for late submission or payment of VAT returns impacted your level of trust in HMRC? Base: All businesses (n = 1,202). Note: Combined percentages may not add up due to rounding.

Businesses with a greater awareness of the detail of the changes were more likely to report their level of trust increasing (15% reported an increase in trust among those with ‘a great deal of awareness’ compared with 6% of those with no or some awareness). 

Businesses with a turnover of less than £85,000 were more likely to say trust increased (10%) compared with 6% of businesses with a turnover of £85,000 to £300,000. 

By contrast, businesses with newer VAT registrations were more likely to report a decrease in trust (13% decreased among those VAT registered less than 4 years compared with 7% among those registered for 10 or more years). 

Businesses with straightforward VAT affairs were more likely to say that the changes had no impact on their level of trust (82% with non-complex VAT affairs compared with 75% with complex VAT affairs). 

Impact of VAT penalty reform on behaviour

Summary 

This section examined the extent to which the reformed VAT penalty systems for late submission and late payment of VAT returns influenced businesses’ behaviour and approach to compliance. The questions explored whether the introduction of penalty points, financial penalties, and daily-increasing late payment charges encouraged more timely VAT submissions and payments, or greater engagement with HMRC when facing payment difficulties. 

By understanding how penalties affect behaviour, this section aimed to assess whether the reforms have achieved their intended goal of promoting sustained compliance through deterrence and awareness, and to identify the circumstances where penalties are most or least effective in driving behaviour change. The research uncovered that businesses generally agreed that the changes to the penalty systems would encourage behaviour change. Risk of receiving financial penalties would motivate businesses to prioritise submitting returns and making payments on time in the future. 

Agreement with statements on behaviour change

Whilst businesses felt that the changes to the VAT penalty systems would have limited impact on their level of trust in HMRC, they did generally feel that the changes would be effective in encouraging behaviour change. Businesses that have received penalty points and (or) financial penalties, or who may not have received penalties but have at least heard of VAT penalties for late submission and payment were asked a range of statements about ways the VAT penalty systems could lead to behaviour change (Table 7.1). For each statement they were asked how much they agreed or disagreed on a scale from 1 to 5 where 1 was ‘strongly disagree’ and 5 was ‘strongly agree’.

Businesses were generally positive, with more than half agreeing (giving a rating of 5 or 4) with any statement. Businesses were most likely to agree that the new late payment penalties would encourage them to contact HMRC to arrange a payment plan (74%) – 53% said ‘strongly agree’ and 22% said ‘agree’. Almost 2 in 3 (65%) agreed that the late payment penalties would encourage them to pay their VAT on time in the future – 44% said ‘strongly agree’ and 20% said ‘agree’. 

Businesses were least likely to agree that the £200 penalty for late VAT submission encouraged timely submission or that the new penalty point system encouraged you to submit your VAT return on time before reaching a financial penalty (61% and 59% respectively). 

Agreement with these statements was consistent across different types of businesses. Businesses with greater understanding of VAT penalties and greater awareness of the penalty systems were more likely to agree.

These findings suggest that the new penalty point and financial deterrents of the new VAT penalty systems were motivators for businesses to submit and pay VAT on time. Financial penalties appeared to be more effective at driving behaviour change than one-off submission penalties or penalty points, likely due to the immediate and tangible financial consequences. This suggests that the perceived immediacy and visibility of financial consequences may play a key role in motivating compliance. Strengthening communication around the link between prompt payment and avoiding daily charges could reinforce deterrence among less engaged businesses.

Table 7.1: Agreement with behaviour change statements 

Statement	5 – Strongly agree	4	3	2	1 – Strongly disagree	Don’t know	Refused
The new late payment penalties would encourage you to contact HMRC to arrange a payment plan if you were struggling to pay your VAT	53%	22%	13%	3%	8%	1%	0%
The new late payment penalties encouraged you to pay your VAT on time in the future	44%	20%	18%	4%	12%	1%	0%
The £200 penalty for submitting VAT returns late encouraged you to submit your VAT return on time in the future	42%	19%	20%	5%	13%	1%	0%
The new penalty point system encouraged you to submit your VAT return on time before reaching a financial penalty	38%	21%	24%	4%	11%	2%	0%

Source: Source: Q16 To what extent do you agree or disagree with the following statements. Please rate on a scale where 5 is strongly agree and 1 is strongly disagree. Base: Respondents who have received penalty points and (or) financial penalties, or who have at least heard of VAT penalties for late submission and payment (n = 1,150). Note: Combined percentages may not add up due to rounding.

Impacts of risk of receiving a financial penalty on approach to submission 

The research also explored how the introduction of penalty points and financial penalties linked to these points had impacted timely submission of VAT returns. Generally, it was felt that the systems encouraged positive, proactive behaviours (Table 7.2). Overall, 3 in 5 businesses (62%) reported the systems would encourage them to prioritise submitting VAT returns on time and 59% reported that this would increase their awareness and encourage them to more closely monitor deadlines. This is consistent with findings from the previous qualitative research, where businesses reported a range of positive behaviour changes as a result of receiving penalty points for late submission. These included making changes to internal processes, such as by taking personal responsibility for filing and paying rather than delegating, or acknowledging where there was a need for help. Businesses in the qualitative research also reported becoming “more diligent” over deadlines and setting reminders. However, some businesses in this quantitative research felt that the risk of receiving a financial penalty on reaching a points threshold would have no impact on their future approach to VAT submissions (18%). 

Table 7.2: Impacts of risk of receiving a financial penalty on approach to submission 

Impacts % of respondents who had received penalties and (or) have heard of VAT penalties
Prioritising submitting VAT returns on time to avoid further penalties	62%
Increasing awareness and monitoring of VAT deadlines (for example setting reminders or alerts for deadlines)	59%
Paying closer attention to HMRC communications and guidance about VAT	56%
Paying closer attention to more general HMRC communications and guidance	53%
Using an accountant or tax adviser to help with VAT compliance	47%
Changing internal processes to ensure VAT returns are made on time	45%
Becoming more likely to appeal penalties	34%
Becoming less likely to appeal penalties	29%
No impact – our approach to VAT submissions and payments has stayed the same	18%

Source: Q17 What impact, if any, did the risk of a financial penalty on reaching a points threshold have on your businesses approach to submitting VAT returns on time? Base: Businesses who have received penalty points and (or) financial penalties, or who have at least heard of VAT penalties for late submission and payment (n = 1,154). Note: percentages may not sum to 100% due to multicoding. 

Businesses who handled all VAT work internally and long time VAT registered businesses were more likely to report that changes would not impact their future approach (24% no impact among businesses that handled all VAT work internally compared with 13% outsourcing; 23% no impact among businesses that had been VAT registered for 10 years or more compared with 14% registered for 4 or less years). 

These findings suggest that the deterrent effect of the new penalty systems was stronger among newer businesses or those that were less experienced with handling VAT affairs, both of which were likely to be more sensitive to compliance risks. Businesses that were VAT registered for longer or managed their VAT affairs internally may view penalties as less relevant due to their experience. This may indicate a need for continued engagement with these established firms to maintain awareness and prevent complacency. 

Impacts of risk of a penalty that increases daily on approach to VAT payment 

The introduction of a financial penalty that increases daily appeared to encourage positive and proactive behaviours but not among all businesses (Table 7.3). Businesses were most likely to report prioritising paying VAT on time to avoid further penalties (63%) and increasing awareness and monitoring of VAT deadlines (59%). This is consistent with findings from the qualitative research, in which businesses who had received late payment penalties reported making changes to internal processes for managing VAT affairs, including setting up direct debit payments, putting money aside for making payments, and switching to use an accountant. This indicates that the immediacy and visibility of a daily-increasing financial consequence may act as an effective short-term motivator for compliance. 

Table 7.3: Impacts of a penalty that increases daily on approach to VAT payment 

Impacts	% of respondents who had received penalties and (or) have heard of VAT penalties
Prioritising paying VAT on time to avoid further penalties	63%
Increasing awareness and monitoring of VAT deadlines (for example setting reminders or alerts)	59%
Paying closer attention to HMRC communications and guidance about VAT	55%
Paying closer attention to more general HMRC communications and guidance	53%
Adjusting financial planning to ensure funds are available for VAT payments	51%
Changing internal processes to ensure VAT payments are made on time	47%
Using an accountant or tax adviser to help with VAT compliance	46%
Becoming more likely to appeal penalties	36%
Becoming less likely to appeal penalties	29%
No impact – our approach to VAT submissions and payments has stayed the same	19%
Don’t know	1%
Refused	1%

Source: Q18 And what impact, if any, did the risk of a penalty that increases daily have on when you pay your VAT? Base: Businesses who have received penalty points and (or) financial penalties, or who have at least heard of VAT penalties for late submission and payment (n = 1,154). Note: percentages may not sum to 100% due to multi-coding. 

Similar to the view of the late submission penalty system, a notable minority felt that the risk of an increasing penalty would have no impact on their approach to VAT (19%). This aligns with Verian’s previous qualitative research with small businesses. That study found that many participants believed their non-compliance was caused by factors outside of their control, for example due to cash flow issues, thus rendering penalties ineffective in influencing behaviour. 

The deterrent effect of the systems also appeared to diminish among certain groups. This was more common among those who handled their VAT work internally or had been VAT registered for longer (26% no impact among businesses that handled all VAT work internally compared with 14% outsourcing; 25% no impact among businesses that had been VAT registered for 10 years or more compared with 14% registered for 4 or less years). These groups may be more confident in their existing compliance processes, or they may view penalties as manageable and predictable, reducing the perceived risk. 

Taken together, these findings suggest that while daily accruing penalties may be driving greater awareness and timeliness of payments, they were less impactful for businesses that were VAT registered for longer or had greater in-house capacity. For these businesses, other measures such as reminders or communications about the cumulative penalties may help strengthen the impact of the reforms on behaviour change. 

Conclusions 

Most businesses recognised the importance of submitting VAT returns and paying on time but around one in 5 reported difficulties submitting returns (19%) or paying VAT (22%) on time. These compliance hurdles were not intentional but stemmed from practical difficulties such as cash flow pressures, limited administrative capacity, and competing business demands. Businesses that described their VAT affairs as more complex were also more likely to experience difficulties. This suggests that HMRC could offer clearer guidance or additional support to aid compliance. Qualitative findings from previous research also indicated that most businesses felt compliance was constrained by financial pressures that often took priority over paying VAT on time. Qualitative findings from previous research also indicated that most businesses felt compliance was constrained by financial pressures that often took priority over paying VAT on time. 

The awareness and understanding of the 2023 VAT penalty reforms remained mixed. While almost all businesses (95%) had heard of penalties, only half reported a ‘very good’ or ‘good’ understanding of the new rules and detailed knowledge of the new regimes was limited. Lower awareness among those without penalty experience suggests that direct exposure to the new systems was a key driver of understanding. Additionally, only 46% felt that improved knowledge would make them more likely to meet deadlines. Similar to the findings from the earlier qualitative research, this suggests that non-compliance was primarily driven by external financial factors rather than a lack of awareness. 

Among businesses that received a penalty, nearly two-thirds (62%) reported difficulties during the process. These issues were predominantly information-related, such as understanding why they received a penalty (34%) or how to appeal it (32%). Awareness of the appeals process was limited and experiences were mixed. Fewer than one in 5 penalised businesses (16%) used the appeals process, and the qualitative research found that some businesses assumed the process would be laborious, unproductive, and therefore not worth exploring. These findings suggest that limited awareness of the systems and uncertainty around how to navigate it were the main barriers. To address this, HMRC could focus on improving the clarity and accessibility of penalty communications, ensuring that businesses receive straightforward explanations of the reasons for penalties, next steps, and appeal options. 

The perceptions of fairness toward the new systems varied by penalty type. The points-based system for late submissions was generally viewed as fairer and more proportionate, with over half of businesses (55%) favouring the new approach. This structure was appreciated for differentiating between occasional administrative error and persistent non-compliance. These findings indicate that the new points-based system had broadly achieved one of its policy aims of creating a fairer, more proportionate approach to late submission penalties. The perception that the system better distinguished between one off and repeat offenders may help to reinforce a sense of fairness and legitimacy among businesses, particularly those managing VAT internally. 

However, perceptions were less positive for late payment penalties and interest, where a majority of businesses (52%) actually felt the old system was fairer. There was also limited impact on overall trust in HMRC, with 80% reporting no change. In contrast to views of the new late submission regime, the less positive views of the new late payment system indicate that the reforms had not fully addressed perceptions of fairness in this area. The increasing nature of penalties may be viewed as overly punitive by businesses already facing cash flow pressures. 

In terms of behaviour change, the reforms prompted some modest improvements. Financial penalties appeared to be more effective at driving change than one-off submission penalties or points, highlighting the impact of immediate, tangible financial consequences. Many businesses reported that the risk of reaching a penalty threshold made them more attentive to submission deadlines, while the threat of daily accruing penalties encouraged more timely VAT payments. To mitigate future risk, some businesses proactively took steps such as setting reminders or consulting their accountants. 

Demographic details 

When businesses were asked to report any penalties received since the beginning of January 2023 (Table 8.1), one in 4 reported penalty points for late VAT return submissions (24%), 13% reported any financial penalties for late VAT return submissions and 15% reported any financial penalties for late VAT payments. The majority reported no penalties in this time period (65%). 

Table 8.1: Self-reported penalty status 

Status	% All Businesses
Any penalty points for late VAT return submission	24%
Any financial penalty for late VAT return submission	13%
Any financial penalty for late VAT payment	15%
Don’t know	3 %
None of the above	65%
Refused	0%

Source: Q15 Does any of the following apply to your business since 1 January 2023? Have you received… Base: All respondents (n = 1,202). Note: Combined percentages may not add up due to rounding. 

By contrast data held by HMRC reported a higher level of penalties among the same businesses (Table 8.2). Only half of the businesses included in the survey had no penalties (51%) with one in 3 having penalty points from late submissions (32%). Late payment interest and penalties were also recorded as being higher than reported by respondents themselves. 

Table 8.2: Penalty status from sample data 

Status	% All Businesses
Late submission penalty point	32%
Late submission penalty charge	3%
First late payment penalty	14%
Second late payment penalty	7%
Late payment interest	35%
No penalties	51%

Source: Sample information from HMRC. Base: All respondents (n = 1,202). Note: Combined percentages may not add up due to rounding. 

Technical Annex 

Questionnaire design 

The research objectives were met by carrying out both primary and secondary research. Development began with a project inception meeting, followed by a rapid evidence review of relevant research as well as qualitative research on VAT penalty reforms among small businesses. This work informed the questioning and (ii) identified tried and tested questions to be used and (or) adapted. The questionnaire was reviewed by HMRC and then underwent cognitive testing and piloting before fieldwork. 

For cognitive testing, 10 VAT registered businesses were recruited by Roots Research to reflect a range of sizes and sectors. Interviews explored respondents’ understanding and ability to answer questions accurately. Findings were summarised in a short report and discussed with HMRC to agree revisions before piloting the survey with around 30 businesses. Further minor amendments to the questionnaire were made ahead of mainstage fieldwork. 

The final telephone survey of around 20 minutes was conducted among 1,202 VAT registered businesses. This research gathered detailed insights from those who had received penalties since the reforms were introduced. 

Sampling 

The population of interest for this research comprised all businesses within the scope of the reformed VAT penalty regimes. The reforms apply to VAT registered businesses in respect of accounting periods beginning on or after 1 January 2023. All active VAT registered businesses were therefore within scope, regardless of turnover, including those operating below the VAT threshold. 

The survey sample was drawn by HMRC from its database of VAT registered businesses. HMRC specified that overall estimates should have 95% confidence intervals of no more than ±3 percentage points, requiring an effective sample size of at least 1,070. In addition, HMRC requested that robust analysis be possible for key subgroups, including businesses that had received a penalty and businesses of different sizes (based on turnover). 

To achieve this, HMRC indicated that 95% confidence intervals for these subgroups should be no more than ±5 percentage points, necessitating an effective sample size of around 380. The proposed sample design therefore targeted approximately 380 interviews with VAT registered businesses that had received at least one penalty point for late VAT submission under the new regime. This was based on HMRC data showing that 32% of VAT registered businesses had received at least one penalty point, and the assumption that the incidence in the survey would reflect that of the population as a whole. 

To meet these requirements, the study targeted 1,200 interviews overall. The sample was stratified by 3 turnover bands, using a disproportionate design to overrepresent larger businesses and enable robust subgroup analysis. The 3 turnover groups represented an optimal balance, allowing for confidence intervals of ±3 percentage points at the overall level and ±5 percentage points by turnover size band. 

Final fieldwork figures as per Table 10.1.

Table 10.1: Fieldwork figures 

Categories	Number of interviews
Total Interviews	1,202
Unknown turnover	55
Less than £85k	390
£85k to £300k	371
Over £300k	386

Weighting strategy 

Weighting was applied to ensure the sample was representative of the target population.  First a design weight was produced to account for the disproportionate sample design and used as the base weight. Then non-response weighting was applied to correct for systematic non-response in the sample. The targets for the final weighting stage were based on population counts from the administrative data used to source the sample. 

Once weighting was finalised, robust standard errors were calculated, and an average adjustment factor was provided for use in simpler analytical tools.