VAT penalties : how it works ?

All VAT-registered businesses in the UK, including sole traders, are obliged to submit a quarterly VAT return. This document includes information on the amount of VAT that the business has paid and how much it has charged to its customers. The difference between the two amounts determines whether the business is due a VAT refund or whether it has a VAT bill to settle. Understanding and anticipating how and when VAT returns and payments are due is key to avoiding penalties for late filings and late payments. Let’s delve a bit deeper into the subject.

VAT filing deadlines

The date upon which a company registers for value-added tax (VAT) is known as the “effective date of registration”. As soon as it has registered, the company is bound by several obligations, including the need to charge VAT to customers and report it to HMRC in the form of a quarterly document known as a VAT return.

The VAT return covers a three-month time period known as the “accounting period”. Generally speaking, VAT returns should be filed one calendar month and seven days after the end of the relevant accounting period.

To take an example, if a business registers for VAT on 5 April, its first VAT return will cover the period from 5 April to 4 July. Its deadline for filing its first VAT return will be 11 August. Its next accounting period will run from 5 July to 4 October, and so on. Each company’s VAT filing deadline differs, as it depends on the company’s effective date of registration.

VAT returns can either be filed online through the HMRC’s website or through accounting software that is compatible with the Making Tax Digital scheme. Both of these formats should indicate the applicable filing deadlines and reminders can be set, so there is really no excuse to be late!

All VAT payments have to be made electronically, either through a direct debit or by various other electronic formats, including debit or credit cards, direct credits, and bank giros. Cheques can only be used if the company is exempt from submitting online VAT returns, an exemption which must be applied for in advance.

The HMRC website includes a handy VAT payment deadline calculator that calculates the date upon which the VAT payment must be made depending on your VAT return deadline and the payment method that you have chosen to use.

Surcharges for late submissions or late payments

If for whatever reason you are late filing a VAT return or settling your VAT bill, it is important to know what penalties apply and how much your oversight is likely to cost you.

If you submit your VAT return late or pay your VAT bill late, this is referred to by HMRC as a “default”.

The penalties and surcharges that apply to defaults depend on your annual turnover and how often you have defaulted in the past.

If your turnover is less than £150,000 and you have never been late submitting your VAT return or paying your VAT bill, then you will receive a letter from HMRC reminding you that you are late. If you are late again within the next twelve months, then you will receive what is known as a “default surcharge liability notice”, accompanied by escalating penalties set out on the HMRC website.

If you turn over more than £150,000 per year, you will be issued a default surcharge liability notice even on your first default. This is also subject to escalating penalties, which can be found on the HMRC website.

The penalties and surcharges are set by HMRC and will be communicated to you in the event that you are late filing or paying your VAT. Surcharges are a percentage of the tax that has been paid late, an amount which will be determined by HMRC if you have not yet submitted the return.

Penalties for inaccurate VAT returns

Filing an inaccurate VAT return can result in a penalty being imposed by HMRC. This can amount to up to 100% of the tax which has been over-claimed or under-stated. You may also be fined 30% of the amount if HMRC issues you with an assessment that is too low, and you fail to correct it within 30 days.

There is no penalty for filing a late return when there is zero VAT to declare.

VAT fraud occurs when a business deliberately sets out to mislead HMRC as to the VAT they are required to pay, this includes taking cash payments and failing to record them. Serious cases of VAT fraud may fall under criminal legislation and maximum penalties can go as high as seven years in prison and unlimited fines.

Changes for 2023

HMRC has announced significant changes to the VAT surcharges and penalties which come into force on 1 January 2023. The new provisions apply to everyone submitting VAT returns for accounting periods starting on or after 1 January 2023.

From 2023 onwards, penalties for late submissions will operate on a points-based system, with each late return being equivalent to one late submission penalty point. Once a defined penalty point threshold has been reached, a £200 penalty will be issued. You will also receive a further £200 penalty for each and every subsequent late submission.

The penalty point threshold is set depending on how frequently your VAT returns are due (usually quarterly, but they can also be made monthly or annually). Points are reset to zero after 6, 12, or 24 months of submitting returns and making payments in a timely manner.

The penalties for not paying VAT on time operate in such a way that the sooner the VAT is paid, the lower the penalty will be. The longer the VAT is left unpaid, the higher the penalty will be. Full information on the penalty rates to be introduced can be found on the HMRC website.

The UK government is also continuing to explore the possibility of using a split-payment VAT system as a means of tracking VAT payments between UK consumers and non-resident businesses.

Conclusion

Filing your VAT return on time and ensuring that your VAT payment is made is a key part of running a successful business. Given all the digital and online tools now available, it’s never been easier to stay ahead of the game and make sure you don’t fall foul of penalties and surcharges. Mooncard can help you keep on top of your VAT payments. Find out more by booking a free demonstration!