Concerned about VAT or PAYE late payment Penalties from HMRC?

As a small business owner, it is your responsibility to make sure all your tax returns are filed accurately, and the subsequent tax payments are made on time.

Read on to find out more about your options.

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What Happens if you Pay HMRC Late?

Failure to pay HMRC means you will not only liable for late payment tax penalties, but you will also have to pay interest on the payment from the date it was due until it is made.

The exact penalties depend on which type of tax, but HMRC will also consider whether you’ve defaulted before. Above all they favour regular communication and transparency, rather than companies who bury their head in the sand and pretend the situation isn’t occurring.  

What is the Penalty for Late Payment of VAT?

In the case of Value Added Tax (VAT), the same penalties apply to the late filing of VAT returns and the late payment of your VAT bill.  

In the majority of cases, VAT returns must be filed quarterly, but there are also monthly and annual accounting schemes.

Your VAT returns must be filed online one month and seven days after the period end. For example, for quarter ending in March, your VAT return must be filed by 7 April and the VAT was owing for the period must be paid (in cleared funds) by the same date.

VAT Default Surcharge Period: Late Filing or Payment

If you are late filing a VAT return or making a payment to HMRC, you will enter into a 12-month probation period known as a ‘surcharge period’.

If you file any further late returns or make more late payments during this period, you will incur a penalty and the surcharge period will be reset for a further 12 months. Therefore, once you have entered a surcharge period, it will only come to an end when you file and pay 12 months’ worth of VAT returns on time.

Failure to Notify

Failure to Notify, as detailed on the HMRC document here refers to the failure to inform HM and Revenue about various scenarios, for example crossing over the VAT threshold for the first time, or don’t inform them about a taxable activity. This type of failure carries a penalty of between 0-100% depending on whether the act was non-deliberate, deliberate or deliberate and concealed.

Errors in Returns

Penalties for errors in tax returns conform to HMRC’s standard yardstick for gauging liability. Were the errors simply careless and non-deliberate? Or were they deliberate and, as the worst case scenario, deliberate with an intent to conceal?

Careless errors may result in a penalty of 30% potential lost revenue. Deliberate increases to 70%, while concealed could incur a 100% penalty.

Arrears Support for Small Businesses

Once you have entered into a surcharge period, the financial penalties you will incur depend on whether your turnover is more or less than £150,000.

If it is less than £150,000 you will be sent a letter offering support rather than immediately getting a Surcharge Liability Notice (SLN).

This leniency is intended to support small businesses at an earlier stage of growth. However, defaulting again will result in the Surcharge Liability Notice (SLN).

What Interest do HMRC Charge on Late Payments?

Number of Late PaymentsTurnover below £150,000Turnover above £150,000
FirstNo PenaltyNo Penalty
SecondNo Penalty2 percent of unpaid VAT
(unless below £400)
Third2 percent of unpaid VAT
(unless below £400)
5 percent of unpaid VAT
(unless below £400)
Fourth5 percent of unpaid VAT
(unless below £400)
10 percent of unpaid VAT
Fifth10 percent of unpaid VAT15 percent of unpaid VAT
Sixth and Subsequent15 percent of unpaid VAT15 percent of unpaid VAT

Interest charges on VAT

In addition to a late payment penalty, HMRC also charges daily interest on the late payment of VAT by applying a daily rate of 2.75 percent.

HMRC charges the interest from the date the payment is due, to the date the payment is finally made. This charge will be raised when the payment has been in full.  

Penalties for Late PAYE

As an employer, it is essential you operate within the guidelines of the PAYE scheme. That means deducting the correct amount of income tax and National Insurance contributions, and all other employee deductions, and paying them over to HMRC.  

Late payment penalties apply to monthly, quarterly and annual periods of PAYE and all PAYE amounts that are not paid in full and on time. For that reason, an employer can be penalised for some different infringements simultaneously, including a failure to pay the penalty, a penalty for late payments, plus interest.

You will not receive a penalty if only one PAYE payment is late during the tax year (unless the payment is more than six months late). After that, penalties will be applied based on the value of the payment, and the number of times your PAYE has been paid late during the tax year.

The PAYE late payment penalties are:  

  • Between one and three late payments – 1% of the value of the late payments in that tax year;
  • Between four and six late payments – 2% of the value of the late payments in that tax year;
  • Between seven and nine late payments – 3% of the value of the late payments in that tax year;
  • 10 or more late payments – 4% of the value of the late payments in that tax year.

Interest Charges for Late PAYE

In addition to the late payment penalties, HMRC will also charge daily interest at a rate of 2.75 percent on all late payments of PAYE/NICs. This interest will apply from the date the PAYE payment is due, to the date it is eventually made.

Can you Negotiate with HMRC?

  • HMRC are not unflexible and, with an experienced meditator on your side, it may be possible to negotiate certain terms. Part of this will depend upon:
  • your stand with HMRC; have you defaulted before?
  • have you kept in regular communication with them
  • the sums of money involved
  • your company’s current cash flow forecasts
  • Security – in some cases, where the tax owed exceeds a certain amount and HMRC aren’t certain you’ll be able to pay, they may ask for a Security Bond

Need advice about HMRC Tax Problems?

If you would like to talk to someone about HMRC Tax Problems and negotiating time to pay arrangements, call us on 08000 746 757 for free, confidential advice, or use the live chat function below.

We are experts are helping directors tackling business debt, and have long experience mediating with HMRC.