Currently, penalties for late filing of VAT returns and late payment of VAT are dealt with under the default surcharge regime. This means that where either a return is filed late, or a payment is received late, the business receives a surcharge notice. This is being changed as with this method a business can avoid a charge for late filing by paying the VAT due in full. Secondly, there is no difference in the level of penalty for a return or payment made one day late compared with one made months late.
Current Surcharges and penalties
HM Revenue and Customs (HMRC) record a ‘default’ if:
- they do not receive your VAT return by the deadline
- full payment for the VAT due on your return has not reached their account by the deadline
Current Surcharges
You may enter a 12-month ‘surcharge period’ if you default. If you default again during this time:
- the surcharge period is extended for a further 12 months
- you may have to pay an extra amount (a ‘surcharge’) on top of the VAT you owe
If you submit a late return, you will not have to pay a surcharge if you:
- pay your VAT in full by the deadline
- have no tax to pay
- are due a VAT repayment
HMRC will write to you explaining any surcharges you owe and what happens if you default again.
How much you pay
Your surcharge is a percentage of the VAT outstanding on the due date for the accounting period that is in default. The surcharge rate increases every time you default again in a surcharge period.
This table shows how much you’ll currently be charged if you default within a surcharge period.
You do not pay a surcharge for your first default.
| Defaults within 12 months | Surcharge if annual turnover is less than £150,000 | Surcharge if annual turnover is £150,000 or more |
| 2nd | No surcharge | 2% (no surcharge if this is less than £400) |
| 3rd | 2% (no surcharge if this is less than £400) | 5% (no surcharge if this is less than £400) |
| 4th | 5% (no surcharge if this is less than £400) | 10% or £30 (whichever is more) |
| 5th | 10% or £30 (whichever is more) | 15% or £30 (whichever is more) |
| 6 or more | 15% or £30 (whichever is more) | 15% or £30 (whichever is more) |
Current Penalties
HMRC can currently charge you a penalty of up to:
- 100% of any tax under-stated or over-claimed if you send a return that contains a careless or deliberate inaccuracy.
- 30% of an assessment if HMRC sends you one that’s too low and you do not tell them it’s wrong within 30 days.
- £400 if you submit a paper VAT return, unless HMRC has told you that you’re exempt from submitting your return using your VAT online account or Making Tax Digital compatible software.
New VAT penalties for late payments and submissions from 1st April 2022
From 1st April 2022 there will be separate penalties charged for late filing and late payment. Additionally, the penalties will increase in stages – punishing those who file or pay significantly later more than those who miss deadlines by a few days. A key feature of the new system is that it will no longer be possible to avoid a late filing penalty if the VAT is paid on time, or if the return shows a repayment is due.
First Penalty
The taxpayer will not incur a penalty if the outstanding tax is paid within the first 15 days after the due date. If tax remains unpaid after Day 15, the taxpayer incurs the first penalty. This penalty is set at 2% of the tax outstanding after Day 15. If any of this tax is still unpaid after Day 30, the penalty increases to 4% of the tax outstanding after Day 30.
Additional or Second Penalty
If tax remains unpaid on Day 31, the taxpayer will begin to incur an additional penalty on the tax that remains outstanding. It accrues on a daily basis, at a rate of 4% per annum on the outstanding amount. This additional penalty will stop accruing when the taxpayer pays the tax that is due.
Time-to-Pay arrangements
HMRC will offer taxpayers the option of requesting a Time-To-Pay arrangement. This enables a taxpayer to stop a penalty from accruing any further by approaching HMRC and agreeing a schedule for paying their outstanding tax. If agreed, the Time-To-Pay Arrangement has the same effect of paying the tax and stops penalties accruing.
The examples below illustrate how TTPs work, and the effect of a TTP is shown in this chart:
| Days after payment due date | Action by customer | Penalty |
| 0-15 | Payments made or TTP is proposed by Day 15 and then agreed | No penalty is payable |
| 16-30 | Payments made or TTP is proposed by Day 30 and then agreed | Penalty will be calculated at half the full percentage rate (2%) |
| Day 30 | Some tax is still unpaid, no TTP agreed | Penalty will be calculated at the full percentage rate (4%) |
If tax is still unpaid on Day 31 a second, additional penalty will start to accrue at 4% per annum.
To see examples of how this new arrangement is calculated, please go to HMRC’s example page here.
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