VAT Late Payment Penalties & Late Filing - An Overview

Value Added Tax (VAT), a type of indirect tax, is collected from consumers on the sale and provision of goods and services. Businesses that register for VAT are responsible for collecting VAT from customers and paying it to their local tax authority. It is essential to file returns correctly and pay your taxes on time, as failure to do so can result in hefty penalties. 

In this blog, we’ll explore the different types of VAT penalties for late filing and payment. 

Overview of the Late Filing and Payment Penalty System

In the United Kingdom, a VAT returns filing and payment system is used to ensure that business owners file their taxes on time. When a company fails to submit or pay its taxes within the required timeframe, it can face financial penalties imposed by HM Revenue & Customs (HMRC). 

The exact amount of penalty depends on how late the return and payment are made, but generally, it can range from £100 to several thousand pounds. 

The HMRC penalty system consists of two main types of penalties: fixed and variable. Fixed penalties are issued for late filing and payment, while variable penalties are given for “careless” or “deliberate” errors on your tax return. 

VAT Late Payment Penalties & Late Filing - An Overview Infographic

Fixed Penalties: VAT Late Payment Penalties

Under HMRC’s current penalty system, fixed penalties are levied if your VAT return is filed late (after the due date) or your payment is overdue. The amount of the penalty can vary depending on how late the filing/payment was made. 

For example, if you file your return one month late, the penalty will be different from if you file it three months late.

Fixed penalties are issued as follows:

  • 3 Months Late: A fixed penalty of £100 is applied
  • 6 Months Late: A fixed penalty of £220 is applied
  • More than 6 Months Late: A fixed penalty of £400 is applied

Variable Penalties: Careless and Deliberate Errors

In addition to the fixed penalties, HMRC can also impose variable penalties if there are careless or deliberate errors on your tax return. A careless error is one that was made without any intention to evade taxes; for example, an incorrect calculation of the VAT due. 

A deliberate error, on the other hand, is one that was made with the intention to evade taxes; for example, deliberately omitting income from your tax return.

When is Your VAT Payment Due?

The amount of variable penalty depends on the severity of the offense and can range from 15% to 20% of the estimated amount of tax due as a result of the error or up to 100% in cases of deliberate avoidance. The penalty can be reduced if you can demonstrate that you took reasonable care when submitting your tax return.

You must pay the VAT due on or before the 18th of each month. If you fail to pay by this deadline, you will be subject to a late payment penalty. 

With this in mind, it is advisable to submit your tax return in advance if possible so that you can pay any amount due on time.

Another way to avoid penalties is to appeal any surcharges issued by HMRC if you believe they are unfair.

How Late Filing and Payment Penalties Are Calculated

The amount of penalty depends on the period of time your payment or return was late. If you file a VAT return more than one month after its due date, HMRC will calculate the penalty based on the amount of tax outstanding at that point. 

For example, if your original return was filed with £1,000 in VAT due and two months later you still have not paid it, HMRC will apply a penalty to the entire £1,000. 

By contrast, if you file your return one month after its due date and pay the VAT due two months later, HMRC will calculate the penalty based on the amount of tax outstanding at that point. 

If your payment were £800 instead of £1,000 when it was due two months later, HMRC would only apply a penalty to the £800 outstanding at that point.

How to Submit a Return and Make Payments

Submitting a VAT return is easy and can be done quickly online via the HMRC website. The first step is to register for VAT, which can be done through the Government Gateway portal. Once registered, you will receive your 10-digit VAT registration number, which must be used when submitting your returns and payments. 

When filing a return, you must provide information such as the period of your return, the total amount of VAT due, and any adjustments or corrections. You will then need to submit payment via bank transfer or make a payment using a debit card.

The Cost of Late Payment or Filing

As mentioned earlier, failure to file or pay your taxes on time can result in hefty penalties. It is, therefore, important to take all necessary steps to ensure that you meet the deadlines set by HMRC. 

The cost of late payment and filing depends on how long it took you to submit your return or payment but generally can range from £100 to several thousand pounds.  Late payment penalties are especially costly and can amount to several percentage points of the total VAT due. 

Interest Charged on Late Payment: The interest rate is currently set at 3% per annum for all taxes; however, it may vary depending on certain circumstances. For instance, if you have a dispute with HMRC and are waiting for factors, such as the amount of time it takes you to make the payment. 

Following are the Tips on How to Avoid Penalties:

VAT Late Payment Penalties & Late Filing - An Overview Infographic
  • Make sure your return is correct and submitted on time
  • Keep records of all payments or refunds 
  • Review your accounts regularly and check for errors 
  • Consider hiring a professional to help with your tax filing 
  • Set reminder dates for payments on time 
  • Pay any overdue taxes as soon as possible   

Surcharges for VAT Penalties: Surcharges are additional penalties that can be applied if you have previously been issued a penalty for a similar offense. These are designed to deter taxpayers from repeating the same mistakes and will increase the amount of any subsequent penalty. 

Appeals Process for VAT Penalties: If you think a penalty has been issued unfairly, you can appeal it by submitting an appeal letter and any relevant evidence to HMRC. HMRC will then review the case and decide if the penalty should stand or be reduced or canceled.

It is important that businesses take all necessary steps to ensure that their VAT returns are correctly filed, and payments are made on time in order to avoid costly penalties. 

How to Appeal a Penalty Surcharge

If you disagree with a penalty surcharge imposed by HMRC, you can appeal it by submitting an appeal letter and any relevant evidence. HMRC will then review the case and decide if the penalty should stand or be reduced or canceled. 

It is important to note that appeals must be submitted within 30 days of the date on which the surcharge was imposed. If you fail to do so, the penalty will automatically be enforced and cannot be appealed anymore.

Final Thoughts

Although it can be difficult to keep up with all of the tax filing requirements, ignoring your responsibilities and failing to pay or file your taxes on time can result in costly penalties. Therefore, it is important to ensure that you take all necessary steps to submit your returns and payments accurately and timely in order to avoid any penalties. By following the tips outlined in this article, you can reduce the risk of penalties and ensure that your tax returns are up-to-date. 

Get in touch with Excel Accounting and Taxation to learn more about the VAT Late Payment Penalties and Filling or regulations regarding VAT, or consult the HMRC website.

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