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A Guide to HMRC VAT Penalties and Surcharges

HMRC applies a systemised process of penalties and surcharges when your company defaults on its VAT liabilities. This includes the late filing of your VAT return as well as the payment of tax.

The deadline for filing and payment is generally one calendar month plus seven days from the end of each accounting period, but you should also include the time needed to clear payment in HMRC’s bank account.

It is worth noting that no surcharge will be applied if you pay the outstanding VAT amount in full, even if your return was filed late. HMRC can send VAT filing reminders if you check the requisite box within your company’s online account.

Begbies Traynor is able to help you negotiate with HMRC for more time to pay your tax liabilities, whether VAT, corporation tax or PAYE. Time to Pay arrangements can be valuable in cases where default is a possibility.

Businesses with a turnover of less than £150,000

Smaller businesses with a turnover of less than £150,000 are treated slightly more leniently than larger businesses in this process.

  • 1st default: no surcharge is payable on first default. HMRC issues a letter intended to provide help and guidance. If another default occurs within 12 months of receiving the letter, the company will enter an official 12-month VAT surcharge period.
  • 2nd default: again, no surcharge is payable on second default, but you will receive a Surcharge Liability Notice from HMRC. This means that you enter the official surcharge system.
  • 3rd default: a surcharge of 2% of the VAT amount outstanding is made.
  • 4th, 5th and 6th (and any further) defaults: surcharges rise steeply on further defaults to 5%, 10% and 15% respectively, of the amount owed.

Business turnover of £150,000 or more

  • 1st default: no surcharge is made, but you enter the formal 12-month surcharge period straightaway. Notification of this is received via a Surcharge Liability Notice.
  • 2nd default: 2% of the outstanding amount of VAT is added.
  • 3rd default: the surcharge rises to 5% of the amount outstanding.
  • 4th, 5th (and any further) defaults: 10% and 15% respectively.

The surcharge period can be extended by HMRC, in which case they will send a ‘Surcharge Liability Notice Extension’.

Other potential late payment penalties for VAT

These include:

  • £400 for submitting a paper return rather than filing online unless it has been agreed by HMRC
  • Careless or deliberate mistakes carry a penalty of 100% of the tax understated or over-claimed
  • Failure to file a VAT return will result in a ‘VAT notice of assessment of tax’ being issued by HMRC. If you know their assessment is an underestimate, you must inform HMRC within 30 days or you may face a penalty of 30% of the assessment sent.

Interest on underpaid VAT

In certain circumstances, HMRC will charge interest on underpaid VAT if you:

  • have paid an assessment of your VAT liability because you failed to file your return on time, and the assessment was later found to be too low
  • reclaim an excess of VAT, or include less VAT on your return than the amount actually charged
  • inform HMRC of an error on your VAT return that led to an underpayment.

You have 30 days in which to pay the amount stated in HMRC’s notification letter, after which further interest payments will be charged.

There will be no surcharge payable if you submit a late return, but have no tax to pay.

One of the reasons why it is so important to pay HMRC on time is that defaulting on any tax liability indicates to them that you may be approaching insolvency. HMRC are known to be unrelenting in the pursuit of debt.

Begbies Traynor are licensed Insolvency Practitioners operating from an extensive UK office network. We are able to offer a same-day consultation free of charge to discuss your situation.

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Insolvency Practitioners Association Institute of Chartered Accountants in England and Wales R3: Association of Business Recovery Professionals ICAEW Business Advice Service Turnaround Management Association ACCA (the Association of Chartered Certified Accountants) ICAS | The Institute of Chartered Accountants of Scotland
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