How do VAT return penalties work with regards to late filing and late payment?

Question – I am a VAT registered small business owner and I am concerned about VAT penalties. I have filed my VAT returns late with HMRC twice in the last year, and I was late paying once as well. Can you advise as to what the penalties are for late filing and payment as well as any other issues to consider?

Answer, June 2016 

In cases of VAT (unlike many other taxes) HMRC do give the taxpayer a small amount of leeway with regard to late submission of returns and late payment before issuing penalties.

The VAT return filing deadlines and payment deadlines are explained by HMRC here.

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.

With regards to penalties – 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 by the deadline

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.

VAT Return Penalties - VAT Late Filing and Late Payment

 

HMRC have issued the following as a guide to the VAT surcharges that may apply in the 12-month period:

Defaults in last 12 months Surcharge if your annual turnover is less than £150,000 Surcharge if your annual turnover is £150,000 or greater
2nd No surcharge 2% (no surcharge if this is less than £400)
3rd 2% of any VAT due (no surcharge if this is less than £400) 5% (no surcharge if this is less than £400)
4th 5% of any VAT due (no surcharge if this is less than £400) 10% or £30 (whichever is greater)
5th 10% of any VAT due or £30 (whichever is greater) 15% or £30 (whichever is greater)
6 or more 15% of any VAT due or £30 (whichever is greater) 15% or £30 (whichever is greater)

 

As you can see from the above table, the penalty (surcharge) increases in line with the level of delinquency of the VAT registered business.

HMRC would write to the VAT registered business to let them know the surcharge they wish to apply and outline their position should a default re-occur.

There are a number of exceptions to the above table. There would be no surcharge if you submitted a late return but paid any VAT due in full by the due date.

HMRC would not issue a surcharge if either there was no VAT to pay over or you were due a repayment for the period in question.

In the instance of the original question it is not entirely clear what the penalty may be without knowing the amount of VAT owed.

If, for example, we assumed that annual turnover is greater than £150,000 and £10,000 of VAT was owed to HMRC for each default then the following would apply.

  • 1st time VAT return was late – Enter 12-month surcharge period
  • 2nd time VAT return was late – A surcharge of 2% would be due, however this amount is below £400 so no amount due to HMRC
  • Late payment of VAT (3rd offence) – A surcharge of 5% would be due – £500.

HMRC can also charge further penalties should the following occur:

  • 100% of any tax under-stated or over-claimed if you send a VAT return with a deliberate or even careless inaccuracy
  • 30% of an assessment of VAT due if HMRC send you a VAT assessment that is too low and you don’t advise that is incorrect within 30 days
  • £400 if you submit a paper VAT Return, unless HMRC have told you that you’re exempt from submitting your return online, in which case paper VAT returns are ok.

Overall we recommend you seek professional advice in regard to the submission and completion of your VAT returns and ensure that your information is collated in an accurate and timely manner so as to avoid further VAT return penalties for late filing and payment.

You may also want to read our article about Making Tax Digital for VAT.