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Reviewed by
Chris Andersen
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Reviewed by Chris Andersen

Chris became an Insolvency Practitioner in 2014 and is currently regulated by the IPA.

He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.

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12th July 2023

More and more businesses are struggling to pay their VAT on time and in full. As the owner or director of a limited company, failure to file your VAT return or make payment by the deadline could leave you liable for VAT surcharges and penalties.

If you are having trouble paying your VAT bill in full, your business is suffering from a cash-flow problem, which could also mean your business is insolvent. Continuing to trade as an insolvent business can have serious repercussions for company directors, making them personally liable for any debts the company incurs during this time.

Given the seriousness of this situation, it is essential you understand penalties and surcharges, when they can be applied, and what they mean for your business.

Contents
  1. What’s the Difference Between VAT Penalties and Surcharges?
  2. How are VAT Penalties Imposed?
  3. What is Considered a Default?
  4. How Much will you Have to pay?
    1. There will be no Surcharge if you Submit a Late VAT Return but:
    2. Additional Penalties:
  5. What happens if you’re liable?
    1. How can we help?

What’s the Difference Between VAT Penalties and Surcharges?

VAT penalties and surcharges are actually one and the same thing. Many people believe VAT penalties are only issued for the late filing of VAT returns, but they can also be handed out when an incorrect amount is paid, or, in more serious cases, where a simple act of fraud has taken place i.e. inaccurate returns are filed. In fact, there’s even a penalty for failing to deregister a business if it no longer meets the VAT payment requirements.

How are VAT Penalties Imposed?

VAT penalties are additional fees that are added to your VAT tax bill in accordance with certain criteria. The amount you pay is calculated by multiplying the VAT arrears by a certain percentage. Every time you default on the payment, the percentage will rise accordingly.

What is Considered a Default?

• They don’t receive your VAT return by the deadline – which you can find here
• The full VAT payment hasn’t reached HMRC’s account by the deadline

The first time a business defaults no surcharge will be applied. Instead, you will enter a 12-month surcharge period. If the business defaults again during this time, HMRC may:

• Extend the surcharge period for a further 12 months, or
• Ask you to pay a penalty on top of the VAT you already owe

How Much will you Have to pay?

The penalty is a percentage of the outstanding VAT you owe for the accounting period in default. The surcharge rate will then increase every time you default in the same period. VAT penalties are added to your arrears in the following way:

Defaults within 12 months Surcharge if annual turnover is less than £150,000 Surcharge if annual turnover is more than £150,000
2nd No surcharge 2 percent – no surcharge if this is less than £400
3rd 2 percent – no surcharge if this is less than £400 5 percent – no surcharge if this is less than £400
4th 5 percent – no surcharge if this is less than £400 10 percent
5th 10 percent 15 percent
6th or more 15 percent 15 percent

There will be no Surcharge if you Submit a Late VAT Return but:

• Pay in full by the due date
• Have no tax to pay
• Are due a repayment

Additional Penalties:

• 100 percent of any tax understated or over-claimed if you file a return with a careless or deliberate inaccuracy
• 30 percent of an assessment if HMRC sends you a VAT bill that ‘s too low and you don’t tell them it’s incorrect within 30 days
• £400 if you submit a paper return unless HMRC has told you you’re exempt from online filing

What happens if you’re liable?

If you are liable for a penalty, you will be contacted by HMRC in writing to inform you that they have applied a penalty to your account. This communication will explain:

• Why you have received a penalty
• The period the penalty applies to
• The tax amount liable to the penalty
• The amount of any penalty previously assessed for the period
• The total penalty for the period
• How and where to make the payment

If you are a serial defaulter or have insolvently liquidated a company previously and VAT was unpaid an HMRC Notice Of Requirement (NoR) for a security bond may be the next step. This NoR for security bond is extremely serious and in some respects more serious than a winding up petition. The reason is simple the directors/individuals named on the NoR are held personally liable jointly and severally for any offences. In effect, HMRC provides a date in which the company must cease to trade and provide security by. Failure to ignore this HMRC notice of requirement will mean a £5,000 fine for each offence and ignore the NoR is a criminal offence.

How can we help?

Our very experienced team of company rescue experts can help negotiate a payment plan with HMRC for all tax arrears, including corporation tax payment problems and PAYE debts. We can also help if you want to consider potential financing deals to remove the problems you are facing when paying the taxman. The earlier you seek help, the better, as this can prevent further penalties on late or undeclared payments. For more information, please contact Company Debt. today on 0800 074 6757.