Assuming that you have had a conversation with your accountant about avoiding VAT penalties, you may now feel as though all of your options have been exhausted. This is where we may be able to help and provide you with advice for your specific situation.

HMRC introduced VAT & tax penalties to help prevent abuse in the VAT and Excise tax systems in 2010.

The aim of this page is to give you some guidance as to how to avoid more VAT or tax penalties specificially and to help prevent further tax related problems.

Keep in mind that HMRC takes a closer look at companies that are insolvent when VAT is involved, so directors should always be prepared. If a director or a company secretary has been proven to have made a decision that was deemed ‘wrongdoing’ by HMRC, it can lead to them being held personally liable.

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VAT Penalties

VAT Penalty Amounts for Late Payment

No. of Payment Defaults in last 12 monthsPenalty Surcharge When Turnover is Less Than £150,000 p.a.Penalty Surcharge When Turnover Exceeds £150,000 p.a.
2ndNone2% (there is no surcharge if this is less than £400)
3rd2% of any VAT due ( there is no surcharge if this is less than £400)5% (there is no surcharge if this is less than £400)
4th5% of any VAT due (there is no surcharge if this is less than £400)10% or £30 (whichever amount is greater)
5th10% of any VAT due or £30 (whichever amount is greater)15% or £30 (whichever amount is greater)
6 or more15% of any VAT due or £30 (whichever amount is greater)15% or £30 (whichever amount is greater)

How is a VAT Penalty Calculated?

The VAT penalty is dependent on whether ‘wrongdoing’ was involved and the percentage of the potential lost VAT revenue. Consideration of whether any ‘wrong doing’ was deliberate and concealed; deliberate, but not concealed, or not deliberate will be taken into account.

HMRC will also take into consideration whether you contacted HMRC and brought this to their attention, or they contacted you and brought the matter to your attention. They will also assess how much information you revealed and how detailed your record keeping was. Having assessed the amount of lost VAT revenue they can apply the penalty as a percentage of VAT revenue lost up to a maximum of 100%.

So, if HMRC has lost £100,000 in lost revenue, they can make you pay £200,000 back including the VAT penalty.

For Errors

The idea was that VAT penalties were introduced to stop non-tax paying companies gaining an unfair advantage in the market which, in itself, is a good idea. The devil is always in the detail, and a common challenge for directors of small companies is keeping proper records.

If you are misapplying VAT when trading, or are not charging VAT when you are selling or buying goods, then it is likely that you are committing a ‘wrong doing’ and are likely to pay a VAT penalty.

Unless you have a reasonable excuse for not paying VAT arrears then you, as a director, must be very careful as HMRC have many tools in their kit, including a visit from the investigations unit or HMRC compliance team. A visit from either of these two HMRC departments can be nerve shattering and disastrous for any business. 

For Late Registration

For example, if you drift over the VAT threshold, carry on trading and don’t declare or collect VAT this can be a huge problem. Do not wait for your accountant or your agent to tell you to register for VAT as it is your responsibility as a director and you will be held to account, not the accountant.

Penalties for this are as follows:

  • 5% of the late VAT if you registered no more than nine months late
  • 10% of the late VAT if you registered between nine and 18 months late
  • 15% of the late VAT if you registered more than 18 months late.

For Inaccurate Returns

HMRC offers a useful document with all the information you could need here.

Is There a Reasonable Excuse for VAT ‘Wrongdoing’?

A reasonable excuse will only be acceptable where an unforeseeable and or exceptional event, beyond your control, has taken place and clear evidence must exist to support the case.

Typical acceptable reasons may be the death or serious illness of someone closely connected to you.

It is highly unlikely if your accountant makes an error that they will accept this as a reasonable excuse as you are responsible as a director. HMRC may take this into consideration, but we have come across many cases where this has not been accepted, and this includes theft of taxes that were paid to the accountant.

Personal Liability Notice (PLN)

Be aware that a director can, in some circumstances, be made personally liable for an employees ‘wrongdoing’ if sufficient care has not been taken to monitor and control the employee. This situation would be aggravated if the company was insolvent or the director should reasonably have known that the company would end up in an insolvent liquidation.

If you have substantial HMRC penalties and you are having trouble paying corporation tax, or you cannot pay PAYE or VAT, your company may be insolvent, so call 0800 074 6757 to speak to a specialist consultant who can help.