If your business misses a VAT payment deadline, HMRC will begin to impose penalties and add fees (or surcharges) on top of the VAT payment due. Surcharges will increase by percentage according to the number of defaults in a 12 month period. The percentages also increase the higher the turnover as they are of the view that larger companies should have better systems in place for paying VAT.
See the table below of surcharges
Number of defaults (within 12 months) | Businesses with annual turnover less that £150k | Business with annual turnover of £150k or more |
2 | No fee | 2% (no fee if less that £400) |
3 | 2% (no fee if this is less than £400) | 5% (no fee if less than £400) |
4 | 5% (no fee if less than £400) | 10% or £30 (highest amount) |
5 | 10% or £30 (whichever is highest amount) | 15% or £30 (highest amount) |
6 or more | 15% or £30 (whichever is highest amount) | 15% or £30 (highest amount) |
Source: https://www.gov.uk/vat-returns/surcharges-and-penalties
Note: Once you are in a surcharge period of 12 months and you default again, this will extend to another 12 month surcharge period.
VAT Penalties
VAT penalties are slightly different to surcharges as they are not automatic but are administered dependent on compliance and behaviour. i.e. if you have deliberately withheld VAT and have tried to cover it up then HMRC can apply a penalty of up to 100% of the outstanding amount.
See the table below
| Type of behaviour | Unprompted disclosure | Prompted disclosure |
| Reasonable care | No penalty | No penalty |
| Careless | 0% to 30% | 15% to 30% |
| Deliberate | 20% to 70% | 35% to 70% |
| Deliberate and concealed | 30% to 100% | 50% to 100% |
Avoid VAT penalties or surcharges
Speak to us as soon as possible, preferably before the deadline if you’re unable to pay VAT or PAYE. We may be able to arrange a time to pay deal with HMRC so payments can be spread over a few months to a year to help ease cash flow pressure.
Penalties and surcharges can be also be bound by a company voluntary arrangement. When HMRC agree to a CVA the debt also include any additional charges. See this page on HMRC and CVAs for more information on how HMRC work with CVAs. It should be noted that HMRC like to see compliance if they are to vote in favour of the proposal. So if the company looks like it has been disingenuous with its dealings with HMRC rather than just getting behind with payments then an acceptance is less likely. Remember though that HMRC will be bound if 75% by value vote in favour. Therefore it depends on the profile of the unsecured creditors as to whether the proposal is accepted.
Categories: HMRC Time to Pay Arrangement
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Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.