If you miss your VAT filing and payment deadline, then you can face penalties and surcharges.

The amount of each you may need to pay varies according to:

  • circumstance;
  • turnover and;
  • the number of late VAT returns that have been filed.

How to Check VAT Return Dates and Payment Deadlines

What Happens When You Submit a Late VAT Return

When you file a late VAT return HMRC marks you as being in default and you face being charged surcharges, penalties and even interest.

HMRC will mark you as being in default when you:

  • file a late VAT return;
  • are late paying your VAT.

When you are VAT registered you act as a collection agent on behalf of HMRC. This means you are responsible for collecting VAT from your customers but you can also deduct any VAT you have paid from what you have collected.

VAT is therefore not a cost to VAT registered businesses.

But that means HMRC take it very seriously when you default.

If you have filed a VAT return or paid your VAT late, then here is how you can work out whether you will be penalized.

VAT Surcharges

The first type of penalty you can face from HMRC are VAT surcharges.

HMRC will impose VAT surcharges when they:

  • don’t receive a VAT return on time; or
  • have not received for payment on time for a VAT return.

The amount of VAT surcharge you have to pay is calculated by HMRC as a percentage of the VAT outstanding for the VAT quarter in question.

You’ll be able to avoid VAT surcharges if you submit a late VAT return but:

  • pay your VAT in full by the due date;
  • have no tax to pay;
  • are owed a VAT repayment;
  • it is the first time you have defaulted either for filing a VAT return or paying one.

How are VAT Surcharges Calculated?

VAT surcharges are calculated as a percentage based on the annual turnover of the business that has defaulted.

The amount charged rises according to the number of times defaulted and the size of the business.

Here are the current 2019 HMRC Surcharges:

Defaults within 12 monthsSurcharge if annual turnover is less than £150,000Surcharge if annual turnover is £150,000 or more
2ndNo surcharge2% (no surcharge if this is less than £400)
3rd2% (no surcharge if this is less than £400)5% (no surcharge if this is less than £400)
4th5% (no surcharge if this is less than £400)10% or £30 (whichever is more)
5th10% or £30 (whichever is more)15% or £30 (whichever is more)
6 or more15% or £30 (whichever is more)15% or £30 (whichever is more)

Are VAT Surcharges Tax Deductible?

No, VAT Surcharges are not tax-deductible.

If a business is charged a VAT Surcharge then it will be shown as a business expense in the P&L account. But come tax time, the VAT surcharges would not be tax-deductible.

What are the Accounting Entries for VAT Surcharges?

VAT surcharges need to be accounted for as a cost in the profit & loss account.

The bookkeeping entry for VAT surcharges would be:

Dr Penalties (P&L)
Cr VAT Control Account (Balance sheet)

The VAT control account in the balance sheet will then reconcile to the amount owed as per HMRC.

VAT Penalties

HMRC can charge VAT penalties in the following 3 circumstances:

  1. 100% of any VAT understated or overclaimed if you submit a VAT return that contains an error, whether that error was made accidentally or deliberately;
  2. 30% of a VAT assessment if HMRC sends you one that’s too low and you don’t tell them it’s wrong within 30 days;
  3. £400 if you submit a paper VAT Return unless HMRC has told you you’re exempt from submitting your return online.

VAT Interest Charges

HMRC can also charge you interest if you submit an incorrect VAT return and do not pay them the correct amount of VAT.

HMRC can charge you interest at 2.75% on VAT late payments if:

  • You pay your VAT late;
  • If you submit an incorrect VAT return and do not pay them the correct amount of VAT;
  • You choose to pay a VAT Assessment but that amount ends up being lower than your true VAT once you bring your VAT up to date.

Interest is charged at 2.75% and if you don’t pay within 30 days, further interest is charged on the VAT due from the date of the notice.

You’ll be charged interest for as long as you don’t pay, up to a maximum of 2 years.

Updated 19 July 2019

Anita

Anita is a Chartered Accountant with over a decade of experience taking self employed business owners from financially confused to business savvy.
She is the creator of the ‘Go Self Employed’ website, which her corner on the internet where she makes self employment less terrifying.
Anita