Do I Add VAT to a Customers Late Payment Charge

    If you impose a late payment charge or interest onto a customer or client who has not paid then you do not pay VAT on this amount, as this is not a VAT-able supply.  You’ll need to work out the late payment charge on the gross amount that is outstanding also.

    If you have agreed extended payment terms with your customer and additional charges in association with this additional credit, then these charges would be VAT-able since they would be considered as a price extension.  Of course, if subsequent to the agreed period your customer still defaults then any additional charges or interest will no be VAT-able.

    Anita Forrest
    About Anita Forrest

    Anita is a Chartered Accountant with over a decade of working with small business owners. She is the creator of the ‘Go Self Employed’ website, where she simplifies complicated self-employment topics such as taxes, bookkeeping, banking and insurance.