VAT Penalties – Default Surcharges  

For the last few months, VAT penalties have become an important topic in the financial section of the newspapers. This is because the penalty regime for VAT is very different from the rest of the tax world.

A late corporation tax payment by one day will only have an £100 penalty. However, a late VAT return or payment delayed by just one day could attract up to 15% of the tax due as default surcharge. That is how HMRC raised about £3.5 billion from VAT penalties in 2014-15.

How does the VAT penalty regime work?

Under the existing VAT penalty regime, default surcharge is triggered by late filing or non payment. The penalty is calculated as the percentage of VAT due.

Number of defaults in a rolling surcharge period Penalty if turnover is less than £150,000 Penalty if turnover is greater than £150,000
First None None – but 12 month surcharge period begins
Second None – but 12 month surcharge period begins 2% (no surcharge if this is less than £400)
Third 2% (no surcharge if this is less than £400) 5% (no surcharge if this is less than £400)
Fourth 5% (no surcharge if this is less than £400) 10% or £30 (whichever is more)
Fifth 10% or £30 (whichever is more) 15% or £30 (whichever is more)
Sixth or more 15% or £30 (whichever is more) 15% or £30 (whichever is more)

 

An important point that many businesses are not aware of is that by submitting a VAT return late, the business could enter the default surcharge regime. They have effectively wasted the ‘free’ warning and face a surcharge if any payment is late within the next 12 months.

A surcharge penalty is based on the ‘outstanding VAT’ due for the period. This means that the penalty is reduced if some payment on the account has been made on time to meet the liability. Therefore, taxpayers are advised to contact HMRC‘s Time to Pay (TTP) unit if any quarter business cannot pay VAT due on time.

In a recent case, Blue Ocean Associates Limited had to pay £277,185.00 as default surcharges because the VAT return was submitted only one day late.

In short, to avoid surcharges it will be good to prioritise your VAT payment before any other tax payment.

Please contact Naveen Sahney or Alex Millar for any advice on VAT.