Understanding the VAT Default Surcharge
By Laurence Vogel
Whatever you do, stay on top of your VAT return deadlines or the consequences could be dire, says Laurence Vogel
A default surcharge is a penalty levied on businesses that submit late VAT returns or make payments late. VAT registered businesses are required by law to submit their return on time and make sure that payment of the VAT due has cleared to HMRC’s bank account by the due date.
There is no penalty for a first offence; however, a business that submits a VAT return late or makes a late payment is issued with a surcharge liability notice. This begins on the date of the notice and ends 12 months from the end of the latest period in default. If further VAT returns are submitted late during this period, a penalty based on a ‘specified percentage’ ranging from 2% to 15% will apply. The penalty increases up to a maximum of 15% with each default.
The default surcharge system can result in businesses suffering enormous penalties for missing a VAT deadline. The regime makes no allowance as to the reasons for the delay, the length of the delay, or the size of the business. There is also no scope for mitigation of the penalty and only a limited possibility of arguing that a reasonable excuse for the delay existed.
The first time a return is submitted or a payment is received late HMRC will send a Default Surcharge Liability Notice. The notice explains what will happen in the event another VAT return is submitted or paid late in the following 12 months. If another default occurs the notice period is extended for a further 12 months by way of a Surcharge Liability Notice Extension.
No surcharge will be charged at the 2% or 5% rates if the amount due is calculated to be less than £400. There is also a minimum surcharge of £30 for surcharges calculated at the 10% or 15% rates.
The above chart applies to businesses with an annual turnover of more than £150,000. Smaller businesses with a turnover below that threshold will be issued with a letter offering help and support following the first default and will not formally enter the surcharge system until a second default. This process is intended to allow small businesses extra time to sort out any issues surrounding submission, or payment of VAT returns before formally entering the default surcharge system.
HMRC will estimate the amount of VAT owed if no VAT return is submitted and the amount of the surcharge will be based on this amount. The surcharge will be amended once a VAT return has been submitted.
No surcharge will be levied under the following circumstances:
• A nil return is submitted late.
• A VAT repayment return is submitted late.
• If a time to pay agreement has been arranged in advance of the VAT due date. This is applicable only where the terms of the agreement are adhered to.
• The VAT due has been paid on time but the VAT return was late. This will be recorded as a default and will extend the 12-month surcharge period but will not increase the percentage rate.
An important point that many businesses are not aware of is that by submitting a VAT return late a business can enter the default surcharge regime. They have effectively wasted the ‘free’ warning and face a surcharge if any payment is late within the next 12 months.
Electronic payment is compulsory for almost every business. Businesses that file VAT returns online must make payments electronically. Businesses get seven extra calendar days to submit an online VAT return and pay any VAT due electronically. Note the payment must clear HMRC’s bank account by the due date. If the due date for any payment falls on a bank holiday or weekend the payment must clear HMRC’s bank account before then.
Businesses can appeal against the imposition of a surcharge provided they have what HMRC view to be a reasonable excuse for late submission or payment. HMRC accept that taxpayers may have a reasonable excuse in cases involving computer breakdown, illness or loss of key personnel, unexpected cash crisis or loss of records. However, a claim of reasonable excuse will not necessarily be accepted just because it seems to fit into one of these categories. HMRC do not accept that a lack of funds is a reasonable excuse unless this is caused by some unforeseen event.
Taxpayers who disagree with a decision of HMRC may in most cases appeal the decision. If following this appeal agreement cannot be reached taxpayers are left with the option of either requesting an independent HMRC review or appealing to the tribunal.
Published October 2014