VAT penalties - who, what, when and why...

vat.jpgSeveral of our clients have been asked to pay VAT penalties for late filing or late payments, and others haven't, even though they're late. Here we explain why the penalties differ, and what you need to do about it.

In cases of VAT (unlike many other taxes) HMRC give the taxpayer a small amount of leeway with regard to late submission of returns and late payment before issuing penalties. But the penalties rack up quickly if you keep on filing or paying late.

A business has two responsibilities as far as the VAT default surcharge regime is concerned:

  • Pay the VAT on time: including monthly payments on account for larger companies
  • Submit the VAT returns on time

If yoou'd like more information, the VAT return filing deadlines and payment deadlines are explained by HMRC here.

How much?

HMRC record an initial default without issuing a surcharge or penalty the first time that either of the following occur:

  • Your VAT return is not received by the deadline
  • Full payment of any VAT owed is not paid (i.e. in HMRC's bank account) by the deadline

The amount of a penalty then kicks in for a second late filing or late payment, at 2% of the VAT amount; so, for example, if your quarterly VAT bill is £10,000 then you'll pay a fine of £200 the second time it's late.

Unfortunately, the third time the penalty rises to 5%, then 10%, and if it's the sizth time then you'll be paying a fine of 15% of the VAT amount due. And that's even if you paid the VAT on time, but just got your VAT return in late. One court case recently confirmed that a fine of £297,845 was okay, since it was the same percentage as everyone else faces.

There's a little bit of good news if you're a very small business; you get an extra "no-penalty" late filing if your turnover is less than £150,000.

If HMRC don't have your VAT return so don't know how much you owe, they'll work on an estimate - this is known as an ‘assessment’.

When does the late filing penalty reset?

business doc.jpgIf you're late with a filing or payment once, you'll receive a surcharge liability notice for the period. This notice means the business doesn’t get a penalty for the misdemeanour but it will get a penalty if it slips-up again in the following 12 months (see above for turnover less than £150,000). At this point you enter a 12-month period called the ‘surcharge period’.

A further default during this 12-month period leads to the surcharge period being extended for a further 12 months and you may have to pay a surcharge on the amount of VAT owed. I.e. any late filing or payment within 12 months of the first late filing/payment will not only mean a fine, but will also reset the 12 month "clock".

An example may help here: AAA Ltd was a day late filing their quarterly VAT return in March, although they paid it on time. They get a letter and the 12 month period starts. If AAA Ltd's annual turnover was less that £150,000, they get another late filing/payment without penalty, but unfortunately it's not, and they pay late at the end of the next VAT quarter (June), again by a day. This means a fine of 2%, and the clock resets so if they are late before June next year, they'll get a fine of 5%. The 12 month clock resets.

Here's a summary of the whole position....

Default Surcharge if turnover is less than £150,000 Surcharge period
1st No surcharge but if you default within 12 months you enter a surcharge period None, but if you miss another VAT deadline within 12 months of the issue of a help letter you will formally enter the surcharge system.
2nd No surcharge but you enter a surcharge period 12 months
3rd 2% (or no surcharge if it’s less than £400) 12 months from the date of the most recent default
4th 5% (or no surcharge if it’s less than £400) 12 months from the date of the most recent default
5th 10% or £30 (whichever is more) 12 months from the date of the most recent default
6th or more 15% or £30 (whichever is more) 12 months from the date of the most recent default
 
Default Surcharge if turnover is £150,000 or more Surcharge period
1st No surcharge but you enter a surcharge period 12 months
2nd 2% (or no surcharge if it’s less than £400) 12 months from the date of the most recent default
3rd 5% (or no surcharge if it’s less than £400) 12 months from the date of the most recent default
4th 10% or £30 (whichever is more) 12 months from the date of the most recent default
5th 15% or £30 (whichever is more) 12 months from the date of the most recent default
6th or more 15% or £30 (whichever is more) 12 months from the date of the most recent default

 

A handy tip for avoiding paying your VAT late is to setup direct debit for VAT with HMRC, which you can do through your VAT HMRC online account.  But bear in mind you'll still need to get your return in on time.

Any other penalties?

Unfortunately, yes.  HMRC can charge you a penalty (between 15% and 100% of the unpaid amount owed) if your VAT Return is inaccurate.

You can download a copy of HMRC’s penalty document here.