Late payment charges are VAT exempt, so if you impose a late payment charge or interest onto a customer who has not paid then you do not add VAT to this amount on your invoice. You’ll need to work out the late payment charge on the gross amount that is outstanding also.
If you agreed on extended payment terms with your customer, which includes additional charges, then you need to raise a VAT invoice with VAT at the standard rate. Of course, if subsequent to your agreed arrangemnet your customer still defaults then any additional charges or interest will be VAT exempt.
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