Having HMRC arrears and a company VAT default are surprisingly common. Many businesses have trouble with making tax payments on time.

Missed corporation tax payments, VAT or late PAYE payments are quite common for businesses. For many companies, this is simply the result of a temporary shortfall in cash-flow. They intend to pay their VAT in full, but are simply unable to make the payment when the sum becomes due and a VAT default can occur.

If you are unable to pay your VAT liability by the date due, this is not necessarily the end of the world or business. A missed payment may be a symptom of something more serious but either way you should contact HMRC to let them know what is happening.

How do VAT return penalties work

If your business fails to pay its VAT when it becomes due then you could be subject to a surcharge. A surcharge is calculated according to the severity of the default and late payment and the number of missed or late payments there have been. In most cases, your company will not receive a surcharge for its first VAT default.

The first you will hear from HMRC will usually be an instructive letter that outlines the amount of VAT you are required to pay. It is only if you consistently ignore contact from HMRC, or miss a second payment within 12 months, that you may become liable for a surcharge.

How are VAT surcharges calculated?

A number of different factors are taken into account when calculating the cost of your VAT surcharge. This includes:

• Your company’s turnover;
• The size of the VAT bill;
• The number of times your company has defaulted on its VAT payments in the past.

The VAT surcharge table on the official HMRC website will give you a better idea of just how much you will be expected to pay. In addition to a surcharge for falling behind your VAT payment schedule, your company could also face a penalty for failing to file an accurate VAT return.

HMRC can charge you a penalty of up to:

• 100 percent of any tax under-stated or over-claimed if you send a return that contains a careless or deliberate inaccuracy;
• 30 percent of any VAT assessment HMRC sends you that’s too low and you fail to notify them within 30 days;
• £400 if you submit a paper VAT return, unless you are exempt from submitting your return online.

More serious VAT problems

There are also more serious VAT defaults and arrears that could indicate your business is on the path to insolvency. In the last couple of years, HMRC has stepped up its efforts to identify limited liability partnerships and companies (including the directors and officers of those companies) that are more persistent or serious offenders.

This includes individuals or businesses that have been:

Charged a penalty for deliberately avoiding or evading VAT or other tax;

Identified during a Civil Investigation of Fraud under Code of Practice 9 as presenting a continuing risk to the revenue;

Successfully prosecuted for a VAT or other tax offence;

Served with a Notice of Requirement by HMRC to provide security in respect of VAT, PAYE, NIC;

Pursued by the the liquidator on behalf of HMRC for the recovery of money and assets after becoming insolvent.

Dealing with serious VAT defaults

Once a serious VAT default has been identified, HMRC will usually demand all outstanding VAT payments and other tax returns are brought up to date. Penalties and interest will be charged where appropriate, and in some cases HMRC will also require the payment of a guarantee against future VAT liabilities.

In many cases, HMRC inspectors will also visit the businesses affected. These VAT visits can be prearranged, usually by letter, or completely unannounced. Announced visits are most likely when HMRC officers serve a Notice of Inspection in respect to the business’s assets and documents.

After this point, HMRC will consider whether it believes there is likely to be future non-compliance or dishonest conduct on behalf of the company. If it does, the company will be informed that is being placed in the Managing Serious Defaulters programme and monitored, usually for a period of two to five years.

How can we help?

If your business is behind in submitting or paying substantial outstanding VAT returns and receiving HMRC threats you should contact us immediately for expert assistance.

We provide free, no obligation advice on the more serious stages of VAT defaults and tax problems, Personal Liability Notices and HMRC threats. We can also help with Security Bond issues and prevent you being placed on the Serious Defaulters programme.