Understand the penalties for late VAT returns as well as default surcharges and interest that HMRC can also charge along with how each of them is calculated.
Updated 6 August 2021
Table of contents
1. What Happens When You File a Late VAT Return
When you file a late VAT return or are late paying your VAT, HMRC considers you to be in ‘default’ and you could face being charged surcharges, penalties and even interest. The amount of each you may need to pay varies according to:
- business turnover;
- the number of late VAT returns;
- the amount of VAT outstanding.
2. What are VAT Surcharges?
HMRC will impose VAT default surcharges when a business doesn’t:
- file a VAT return on time; or
- not paid VAT on time.
The amount of VAT surcharge levied is calculated by HMRC as a percentage of the amount outstanding for the missed VAT return. 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.
2.1 How are Late VAT Default 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 defaulted vat quarters and the size of the business. Here are the 2021 VAT surcharges rates:
|Defaults within 12 months||Surcharge if annual turnover is less than £150,000||Surcharge if annual turnover is £150,000 or more|
|2nd||No surcharge||2% (no surcharge if this is less than £400)|
|3rd||2% (no surcharge if this is less than £400)||5% (no surcharge if this is less than £400)|
|4th||5% (no surcharge if this is less than £400)||10% or £30 (whichever is more)|
|5th||10% or £30 (whichever is more)||15% or £30 (whichever is more)|
|6 or more||15% or £30 (whichever is more)||15% or £30 (whichever is more)|
2.2 Are VAT Surcharges Tax Deductible?
VAT Surcharges are not an allowable expense although they will appear as an expense in the profit & loss account but will be added back for corporation tax purposes. The double-entry bookkeeping journal for 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.
3. How to Appeal an HMRC VAT Surcharge
If you disagree with a VAT surcharge then you can make an appeal, within 30 days of receiving your default surcharge, to HMRC to ask that they review the surcharge or have your case heard by an independent tax tribunal.
You’ll need to send your surcharge appeal in writing and include the reasons why you disagree with the VAT penalty such as:
- why you have a reasonable excuse** or suffered exceptional circumstances that led to you being in default;
- details of why HMRC have calculated the surcharge wrongly or used an incorrect VAT rate.
Once you’ve written your appeal, you’ll need to post it to:
Dept 200 VAT (DS Reviews & Litigation)
** HMRC don’t have a clear definition of what they consider a reasonable excuse they review each appeal on a case by case basis. But in general, a lack of understanding or being failed by a third party are not considered a reasonable excuse.
4. Late VAT Return Penalties
HMRC will charge a penalty for a late VAT return in the following 3 circumstances:
- If a VAT return contains an error, whether made accidentally or deliberately in which case they will charge a VAT penalty of 100% of any VAT understated or overclaimed;
- If HMRC sends a VAT assessment that is too low and you don’t tell them within 30 days, HMRC will charge a penalty of 30%;
- If you submit a paper VAT Return unless HMRC has told you you’re exempt from submitting your return online, HMRC will charge a VAT penalty of £400.
5. VAT Interest Charges
In addition to the VAT surcharges and penalties, HMRC can also charge interest if:
- You pay your VAT late;
- Submit an incorrect VAT return which results in you not paying 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.
VAT 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. HMRC will continue to charge interest for as long as the money remains outstanding, up to a maximum of 2 years.