What is a VAT surcharge?
Answered 11 March 2026
Here is a comprehensive explanation of the VAT default surcharge, drawing on both the legislation and HMRC guidance.
What the law says
The VAT default surcharge is a civil penalty regime governed by section 59 of the Value Added Tax Act 1994 (VATA 1994).
When a "default" occurs: A taxable person is in default in respect of a prescribed accounting period if, by the last day on which they are required to furnish a return for that period, either (a) HMRC has not received that return, or (b) HMRC has received the return but has not received the amount of VAT shown on it as payable.
The Surcharge Liability Notice (SLN) and Surcharge Period: Where a taxable person is in default, HMRC serves a surcharge liability notice specifying a surcharge period ending on the first anniversary of the last day of the defaulting period. If a further default occurs before an existing surcharge period expires, the new notice extends that period, and both are treated as a single surcharge period.
When a surcharge becomes payable: If a taxable person on whom a surcharge liability notice has been served:
- is in default in respect of a prescribed accounting period ending within the surcharge period, and
- has outstanding VAT for that period,
they become liable to a surcharge equal to whichever is the greater of the specified percentage of their outstanding VAT and £30.
The escalating percentage rates are determined by the number of defaults with outstanding VAT during the surcharge period:
- 1st default with outstanding VAT: 2%
- 2nd default with outstanding VAT: 5%
- 3rd default with outstanding VAT: 10%
- 4th and subsequent defaults with outstanding VAT: 15%
"Outstanding VAT" means so much of the VAT for which the person is liable in respect of that period as has not been paid by the last day on which they are required to make a return for that period.
HMRC guidance / practice
HMRC describes the default surcharge as "a civil penalty to encourage businesses to submit their VAT Returns and pay the tax due on time".
How the surcharge is calculated in practice: The surcharge is calculated as a percentage of the VAT that is unpaid at the due date. If no VAT Return has been submitted, HMRC will assess the amount owed and calculate the surcharge as a percentage of that assessed amount.
Practical thresholds applied by HMRC:
- HMRC does not issue a surcharge at the 2% or 5% rates if the calculated amount is less than £400.
- There is a minimum surcharge of £30 for surcharges calculated at the 10% and 15% rates.
- HMRC will normally recalculate a surcharge assessment if the amount on which it is based changes.
First default — warning only: The first time a business defaults, HMRC issues a Surcharge Liability Notice but no surcharge is payable at that stage — it acts as a warning. A surcharge only becomes payable upon a further default within the surcharge period.
Note: The VAT default surcharge regime under s.59 VATA 1994 has been replaced by a new late payment penalty and interest regime for VAT periods starting on or after 1 January 2023. If your question relates to more recent periods, you may wish to consult HMRC's guidance on the new penalty regime.
Citation sources
The surcharge is calculated as a percentage of the VAT that’s unpaid at the due date. If you do not send in your VAT Return we’ll assess the amount you owe and the surcharge will be calculated as a percentage of that amount. For the first late payment during a surcharge period the surcharge will be 2% of the VAT outstanding at the due date. The rate of surcharge will then increase progressively to 5%, 10% and 15% for further payment defaults in a surcharge period. We’ll normally recalculate a su
ue diligence and proper regard.” Findings of Fact 11. From the documents produced to us, and from what the Appellant said at the hearing, we find the following facts. 12. As set out in the “Schedule of Defaults (and Payments)”, the Appellant entered the default surcharge regime because its payment for the 12/20 quarterly VAT period of VAT due of £1,348.47 was paid late on 8.2.21. As this was the first default no surcharge was payable, but a surcharge liability notice (“SLN”) was issued on 12.2.2
Default surcharge is a civil penalty to encourage businesses to submit their VAT Returns and pay the tax due on time. This notice explains: how to avoid a surcharge how default surcharge works when we apply a default surcharge what to do if you think you’ve a reasonable excuse for submitting your VAT Return or payment late You can find further information about VAT Returns and payments of tax in the VAT guide (Notice 700).
ed the surcharge period during the period 01/21. 56. Section 59(4) VATA provides that if a person defaults in respect of a period ending within a surcharge liability period and has outstanding VAT for the period, he becomes liable to a surcharge. This is an amount which is the greater of £30 and a percentage of the outstanding VAT. The £30 surcharge thus might, for example, apply where the return showed VAT due to the taxpayer. 57. Section 59(5) VATA specifies the rates of penalty for any furthe