Understanding the Consequences for HMRC VAT Penalties
For companies not paying their HMRC VAT payments on time or only making part payments, this is a serious indicator of significant problems with company cash flow. It is mandatory for all businesses to file their VAT return online and make payments within the due dates. The deadline for submitting your business tax return is one calendar month, and seven days after the accounting period. You do have the option to enter your online account and receive reminders for the due date of your VAT return. However, if you do miss the payment date, there could be severe consequences.
HMRC does allow some forgiveness for a company if it is their first late payment within 12 months, but you will be sent a surcharge liability notice (which we will explain in further detail below). If you miss another deadline, you will incur further penalties for your business. It’s important to note that HMRC VAT penalties are not only due for late filing, but can also be imposed on companies paying the wrong amount, or in cases where false declarations are made.
Every business needs to ensure their VAT payments are dealt with correctly and on the date they are due. The annual VAT registration limit is £85,000, and if your turnover exceeds the total, you need to apply for VAT registration within 30 days of this occurance. If you do not, there are VAT penalties for late registration. If you suffer VAT penalties for late registration, you will have a percentage penalty applied to your business, unless you can provide a valid reason for the delay. The first point to note is that this applies to any 12 month period and not just relating to your company tax year. You cannot wait until a convenient time to register after you have hit the threshold as you will be liable for late registration penalties.
- You will owe VAT on all sales from the day you exceeded the limit.
- You will be charged a penalty based on the overall VAT payable.
- If your sales have decreased below the VAT registration limit, you will need to notify this fact or you will remain registered.
Smaller businesses will be treated more lenient to that of larger companies. If your business happens to turnover less than £150,000 these are the following VAT surcharges you will face:
- First default: On your first default, there is no surcharge payable. Your company will receive a letter intended to help and guide you through the process.
- Second default: Again, there will be no surcharge, but you will receive a surcharge liability notice. Your company will then be part of the surcharge system.
- Third default: You will have to pay a surcharge of 2% of the amount that is outstanding with regard to your VAT payments.
- Fourth, Fifth and Sixth: 5%, 10% and 15% surcharge respectively.
If your business has a turnover of more than £150,000, there are more pressing consequences for your company.
- First default: As with a smaller business, no surcharge is made. However, your company will enter the formal 12 month surcharge period. This is where your business will receive a surcharge liability notice.
- Second default: 2% of the outstanding amount you owe in regard to VAT is charged.
- Third default: A 5% surcharge is added.
- Fourth, Fifth default: 10% and 15% is charged respectively.
A default surcharge notice is issued for late payments. It is one of the common HMRC VAT penalties, and refers to a percentage of the amount of tax is owed. The charts above are what your business will be charged.
The default surcharge will last 12 months from your late submission or payment. However, if you incur further late payments, those 12 months will be extended. If you do not have any more late payments in the 12 months, you will leave the default surcharge regime.
Your company can apply for a VAT surcharge appeal, but you must demonstrate your attempts to pay on time and provide valid reasons for not doing so. If your VAT surcharge appeal is successful, the penalty will be cancelled. In recent years, most VAT surcharge appeals are ruled in favour of HMRC.
Valid VAT surcharge appeal reasons:
- Documents are lost due to fire, theft or flood.
- Serious illness or even bereavement at time of VAT registration.
- Lack of funds due to suppliers or customers not paying their debts when they are due.
If your company does not pay their VAT payments on time, HMRC will begin to think your company is facing serious cash flow issues and heading to insolvency. If they believe your company is insolvent and continuing to trade, HMRC will act quickly against your company. You may be able to enter into a time to pay arrangement, which will mean any penalties may be waived as long as you stick to the agreement.
Failing this if you are struggling to pay HMRC VAT and associated penalties, you need to seek advice as soon as possible. Our business rescue experts can provide business funding advice and guide companies facing insolvency.