VAT Penalties: A guide for SaaS and App Companies

Love, death, taxes. Benjamin Franklin’s famous certainties still hold, though he probably didn’t envision SaaS companies juggling Value Added Tax (VAT) compliance across 27 EU countries, the UK, Australia, Canada, and beyond.

If you’re selling digital products or SaaS across borders, you’re already dealing with VAT. And if you’ve crossed registration thresholds in multiple countries, those compliance obligations multiply fast. 

Miss a deadline here, miscalculate a rate there, and suddenly you’re facing a VAT late payment penalty that eats into your margins and creates operational chaos.

Here’s what you need to know about VAT penalties, how they vary across countries, and how to protect your business as you scale globally.

Consequences of paying VAT late

The penalties for late VAT payments aren’t standardized across Europe. Each country sets its own rules, and they can be steep.

Here’s what penalties look like across key markets.

United Kingdom 

Since January 2023, the UK operates a tiered penalty system. If you’re 16 to 30 days late, you’ll pay 3% of the outstanding VAT from day 15. After 31 days, that rises to 4% from day 30, plus daily interest at the Bank of England base rate plus 4% (currently 8% total). 

For a £15,000 VAT payment that’s 51 days late, you’re looking at £450 in first penalties, plus escalating second penalties and daily interest charges. 

Germany

Late filing penalties can reach 10% of the VAT due, capped at €25,000 per return. Late payments incur a 1% monthly interest rate on the outstanding balance. If you’re 16 months behind, the interest rate drops to 0.5% monthly, but you’re already deep in compliance trouble by then.

Companies operating in Germany should be particularly aware that the VAT late filing penalty alone can be substantial before interest charges even begin.

France

The French tax authority can impose penalties up to 100% of the understated VAT amount, plus a 10% surcharge and default interest. For deliberate inaccuracies, the surcharge jumps to 40%. 

Fraudulent intentions result in 80% surcharges and potential criminal penalties, including fines of over €75,000 and prison sentences of up to 5 years.

Spain

Spain uses a surcharge system based on how late you are. Within three months, you’ll pay 1% per month. Between three and six months, it’s 10%. Beyond six months, 15%. 

If Spanish tax authorities discover non-payment during an audit, penalties range from 50% to 150% of the unpaid VAT, depending on severity and whether you’re a repeat offender.

The pattern is clear. The longer you wait, the more expensive it gets. And these aren’t one-time slaps on the wrist. For growing SaaS companies processing hundreds or thousands of transactions monthly, these penalties compound quickly.

What happens if a company doesn’t pay VAT at all?

Late payment is one thing. Not paying at all is another level entirely. Here’s what happens if you don’t pay VAT.

Reputational damage

When tax authorities come knocking, it doesn’t stay quiet. VAT non-compliance investigations become part of your company’s record. Investors conducting due diligence will find it. Enterprise customers reviewing your financial stability will see it. Partners evaluating whether to integrate with your platform will question it.

While most SaaS companies aren’t running criminal operations, the consequences of VAT non-compliance can still be severe. In 2023, the European Public Prosecutor’s Office charged 12 individuals and 15 companies in Operation Admiral, a massive VAT fraud investigation that uncovered estimated losses of €2.2 billion across 30 countries. 

The defendants allegedly used falsified invoices and fraudulent tax declarations to evade VAT on electronics sales. Authorities seized €59 million in assets, including luxury watches, real estate, and vehicles. Five individuals remain in pre-trial detention, facing up to 25 years in prison.

For companies preparing for fundraising rounds, VAT compliance issues flag immediately in due diligence. Tax authorities can share information across borders through mechanisms like the EU’s CESOP (Central Electronic System of Payment Information), making it harder to sweep problems under the rug.

Financial damage

The financial hit from VAT non-compliance extends beyond the obvious penalties.

As covered already, you’d face direct penalties and interest that scale with the unpaid amount and duration. But there’s more.

Here are some other costs you might initially not be aware of:

Audit costs

Once you’re flagged for non-compliance, tax authorities may trigger comprehensive audits. These require legal representation, accounting support, and internal resources to respond to information requests. For a mid-sized SaaS company, audit costs can easily reach €5,000 to €8,000 per jurisdiction annually.

Back taxes with interest

You’ll owe the original VAT amount plus compounding interest. In some cases, authorities can look back four years (or 10 years in fraud cases). That’s a decade of back taxes, penalties, and interest all hitting at once.

Operational disruption

Your VAT registration can be suspended or revoked for non-compliance. In the EU, losing your VAT registration means you can’t legally trade in that market. Your business effectively stops.

Lost revenue opportunities 

While you’re dealing with compliance issues, you’re not closing deals, shipping features, or acquiring customers. The opportunity cost of having your finance and leadership teams bogged down in tax issues is massive.

The financial consequences can force businesses to shut down entirely. In 2024, Hassan Waqar’s four UK companies were struck off after owing HMRC more than £1.1 million in VAT assessments, penalties, and interest. 

The companies had falsely reclaimed nearly £400,000 in VAT using falsified documentation. Waqar was banned as a director for 11 years and made personally liable for the tax debts. What started as improper VAT reclaims ended with complete business dissolution and personal accountability.

How to avoid VAT penalties

Avoiding VAT penalties comes down to systems. These are some things you can do now to avoid VAT penalties in the future.

Track your registration thresholds closely

Different countries have different thresholds for when you must register for VAT. The EU has a €10,000 threshold for cross-border distance selling. The UK threshold for domestic businesses is £90,000 (note: this doesn’t apply to non-UK companies selling digital services to UK consumers, where there’s no threshold).

For digital services, the EU operates on a zero-threshold basis. Your first sale to an EU customer triggers compliance obligations.

This means you must set up monthly monitoring to track your revenue by country. Don’t wait until you’ve blown past thresholds to realize you should have registered months ago.

File returns on time, even when they’re nil

This seems obvious, but it’s a common mistake. 

If you’ve registered for VAT but had no sales in a period, you still need to file a return showing zero activity. Many businesses skip this, thinking “no sales, no filing.” But you couldn’t be more wrong. For example, in Spain, failing to file even a nil return can trigger late filing penalties and escalating fines.

Maintain detailed records

Tax authorities want documentation. Things like invoices, receipts, transaction records, and customer location data. The EU requires at least two non-contradictory pieces of evidence to prove a customer’s location for VAT purposes. 

Keep these records for at least the statutory period (typically 4-10 years depending on jurisdiction). Digital record-keeping systems that automatically capture and store this data are your friend.

Understand different VAT rates and rules

Not all products and services are taxed the same. Standard VAT rates range from 17% to 27% across EU countries. Reduced rates apply to certain goods and services. Some offerings may be exempt.

Misclassifying your products to claim a lower rate can trigger penalties. Get it wrong consistently, and authorities may view it as deliberate fraud rather than innocent error.

Use automation where possible

Manual VAT calculation across dozens of jurisdictions is asking for mistakes. If you’re managing this in-house, at a minimum, use tax software that automatically updates rates and calculates VAT based on the customer’s location.

But even with automation, you’re still responsible for registering in each jurisdiction, filing returns on time, and remitting payments correctly, which brings us to the simplest solution.

Use a Merchant of Record like Paddle

Payment processors handle transactions while leaving you as the Merchant of Record. You own all the tax compliance obligations, liabilities, and administrative burden.

A Merchant of Record, like Paddle, becomes the legal seller. When your customer makes a purchase, they’re technically buying from Paddle. Paddle handles payment processing, calculates and collects VAT/sales tax, files all returns, and remits payments to tax authorities globally.

You receive clean, consolidated payouts without facing any tax liability, registration requirements, or penalty risk.

Stape, a server-side tracking solution serving over 150,000 clients globally, faced this reality when it crossed tax thresholds in Canada and Australia. Their finance team was spending significant time managing compliance issues across jurisdictions with their existing payment processor. 

Without proper tax handling, they risked penalties, limited their ability to expand into new markets, and undermined confidence in their operational maturity. 

After switching to Paddle, Stape’s finance team optimized their time and reduced costs associated with third-party local accounting firms for tax tracking. More importantly, they eliminated the risk of penalties as they continued expanding into new regions. 

“With Paddle, we have protected ourselves for the future,” explains Serge Shkvarnytskyi, Head of B2B and Partnerships at Stape. “It has helped us streamline operations and compliance outside the EU into countries such as Canada and the UK, without additional legal overheads.”

Compare this to other payment service providers that offer tax compliance as a separate product with additional fees on top of payment processing costs. Even then, you typically need to manage multiple integrations and maintain oversight of the compliance processes.

With Paddle, VAT compliance is built into the platform as part of the Merchant of Record service. It’s not an add-on you pay extra for. It’s not something you need to configure and monitor. It’s handled from day one, in every jurisdiction where you sell.

The bottom line

VAT penalties cost you more than money. They also cost you time, focus, and business risk.

As you scale across borders, the complexity multiplies. You can build internal systems to manage this, hire specialists, and invest in tax software. Or you can work with a Merchant of Record that removes the problem entirely.

Want to see how Paddle handles VAT compliance as your Merchant of Record? Create your free account today, or book a demo -  we’ll audit your current set up and give tailored advice on where you can improve your operational efficiency.