- 1. I paid my VAT late. Is there a fine?
- - What is VAT?
- - Who needs to pay VAT?
- - What happens when you miss a VAT payment deadline?
- - Interest charges on VAT
- - What happens if your VAT return is late?
- - Other VAT penalties
- - How to appeal VAT penalties
- - How to appeal VAT interest charges
- - Options if you can't pay your VAT
- - What happens if you still refuse to pay your VAT after multiple fines?
- - How can you avoid paying VAT late in the future?
I paid my VAT late. Is there a fine?June 10, 2021
There's a reason behind every late and missed VAT payment, and HMRC can be fairly understanding, especially if it's your first overdue payment and you're a small business.
However, late payments do have consequences (including fines) as VAT is money which belongs to the government, and is used for public services. If you've paid your VAT late or know you'll struggle to pay it, the best thing to do is find out where you stand in terms of fines, and reach out to HMRC for support.
While the thought of resolving late VAT payments can feel stressful, HMRC have a number of ways to help you pay, whether that's allowing you to pay in instalments or through a Time to Pay Arrangement. As soon as you face the issue, you'll find that there are plenty of solutions to help you get back on track.
In this article, we'll take you through what happens if you pay your VAT late, HMRC's penalties for inaccurate VAT returns and payments, and what to do if you can't afford the amount of VAT you have to pay. Remember to bookmark this article for further reference, and use the contents table on the left to jump to the sections which are most useful for you.
I paid my VAT late. Is there a fine?
If you paid your VAT late, you may be subject to late payment penalties and charged a fine (called a "surcharge") of between 2% and 15% of the total VAT you owe, depending on your company's annual turnover and how many late or missed VAT payments you've already had. If this is your first late payment in 12 months, you won't receive a surcharge, but you may receive a "surcharge liability notice" from HMRC, which puts you at risk of being fined the next time you're late with a payment.
HMRC may also charge you interest and financial penalties if you were late to hand in your VAT return (and didn't pay your VAT by the deadline), as well as if there were inaccuracies on your return that meant you paid too little VAT, or claimed too much of a refund from HMRC.
What is VAT?
VAT (Value Added Tax) is a government tax you have to charge customers on most goods and services you sell, if your company's annual turnover exceeds a certain amount.
For most goods and services, you'll have to charge the standard rate of VAT, which is 20% on most goods and services, if your business meets this turnover threshold. This excludes VAT-exempt (called 'zero-rated goods') like children's clothes. The rules may change if you're selling outside the UK.
Not only do you have to charge this tax on behalf of the government, you have to pay it to them too. Being VAT-registered means you're essentially collecting tax for the government, as it's your responsibility to make sure the VAT you charge gets to them.
Who needs to pay VAT?
You need to pay VAT if your company's VAT taxable turnover is more than £85,000. This means that if your business is making more than £85,000 a year through selling products or services that aren't VAT-exempt, you need to start charging VAT.
As well as charging VAT on your own products, you also have to pay it on products and services you purchase for your company if the business or supplier you buy from has a VAT taxable turnover of more than £85,000. Anyone who buys from a products or services from a VAT-registered company will automatically pay VAT as part of the purchase price – this isn't just something you pay if you're VAT registered.
The good news is, when it comes to paying the government VAT, you can take away the amount of VAT you've already paid on goods you've bought from the amount you've charged as a business and owe to the government.
For example, if you're an office furniture company and you've charged £5000 in VAT on ergonomic chairs, but you've paid £2000 in VAT on consultancy services from another VAT-registered company, you can remove the £2000 you've paid from the £5000 you owe, and only have to pay a VAT bill of £3000.
If you've paid more in VAT than you've charged from customers, you can actually get a VAT refund from HMRC. HMRC will pay you the difference between what you paid in VAT (called 'input VAT') and what you collected as a business (called 'output VAT').
Every three months (or "quarter"), you'll need to file a VAT return, which shows your total sales and purchases as a company during this period, and calculates your VAT bill. You have to pay your VAT one month and seven days after the three month period it's due for. For example, if you are due to pay VAT for the quarter ending May 2021, your VAT will be due by the 7th July.
Rather than inputting the numbers yourself or spending thousands on an accountant, Ember will automatically compute the figures for you, allowing you to work out what you owe, see any refunds you're entitled to, and file your entire VAT return in just a couple of clicks.
What happens when you miss a VAT payment deadline?
If you miss a VAT payment deadline (referred to as 'defaulting'), you may enter a 12 month period, which HMRC calls a 'surcharge period'.
This means that you're at risk of being fined if you default on your VAT payments again.
When and how much you're fined all depends on whether your annual turnover is less or more than £150,000.
If your annual turnover is less than £150,000
- If your turnover is less than £150,000 and this is the first time your first late submission in 12 months, you'll get a reminder letter detailing the amount that you owe, and how to pay it. The tax-man is not out to get you, and HMRC understands that smaller businesses may have cash flow issues and need help getting on their feet, which can affect the payment of VAT.
- If you miss a second VAT payment, you'll get what's called a Surcharge Liability Notice. This puts you in HMRC's surcharge period, and you'll stay there for 12 months. However, you still won't get a fine or financial penalty.
- If you miss a third VAT payment within the 12 month surcharge period, you'll be fined at 2% of the total VAT you owe. If your outstanding VAT is less than £400, you won't have to pay a surcharge.
- If you miss a fourth VAT payment within the 12 month period, you'll be fined at 5% of total VAT owed (no surcharge if less than £400).
- On your 5th default within 12 months, you'll be fined at 10% of total sum owed or £30 – whichever is more).
- On your 6th default within 12 months, you'll be fined at 15% of total sum owed or £30 – whichever is more).
If your annual turnover is more than £150,000
- If your annual turnover is £150,000 or more and you miss a VAT payment within 12 months, you won't get fined. However, unlike a business with a smaller turnover, you'll receive a Surcharge Liability Notice straightaway and get placed into HMRC's surcharge period.
- If you miss a second VAT payment within the surcharge period of 12 months, you'll be fined at 2% of the total VAT you owe (if this amount is under £400, you won't have to pay a surcharge).
- If you miss a third VAT due date within the surcharge period of 12 months, you'll be fined at 5% of the total VAT you owe (if this amount is under £400, you won't have to pay a surcharge).
- On your fourth missed VAT deadline, you'll be fined 10% of the the VAT you owe, or £30 – whichever is more.
- On your 5th default within 12 months, you'll be fined at 15% of the total outstanding tax owed or £30 (whichever is more).
- On your 6th default within 12 months, you'll be fined at 15% of the total outstanding tax owed or £30 (whichever is more).
Interest charges on VAT
Interest is usually charged on VAT when HMRC conducts what's called an 'assessment' into your case, and finds that the amount of VAT you've paid isn't correct. Assessments and interest charges usually happen if:
- You don't send in a VAT assessment and just pay an amount which you assume to be correct to HMRC, but is later proven to be inaccurate. In this case, HMRC can charge you interest on the amount you owe, until you pay it.
- You haven't sent in your VAT return and HMRC have to do an assessment into your case and let you know what they think you owe. If the amount that HMRC ask you to pay is too low and you don't tell them within 30 days, you can be charged interest until you pay the correct amount of VAT.
- On your VAT return, you've reported less VAT than you've actually charged, or you've reclaimed more than you've actually paid. For example, if you reported that you paid £1000 in VAT for office stationery which actually cost you £700 and HMRC find this out, they can charge you interest until you pay them all that you owe.
- You realise you've made a mistake on your VAT return and let HMRC know about it via an error correction (this used to be called 'voluntary disclosure').
HMRC will charge daily interest rates of 2.6% on the amount of VAT you owe from the date that your payment was overdue to the date that you pay it in full.
Can I charge HMRC interest on VAT?
You can charge HMRC interest on VAT if a mistake of theirs has put you out of pocket. For example, if you paid too much VAT as a business, or didn't reclaim all the VAT you were entitled to on your VAT return. You can claim from HMRC a 0.5% interest rate on what you're owed, from the moment that you overpaid VAT (or didn't reclaim as much VAT as you were untitled to), until the date that HMRC repay you.
What happens if your VAT return is late?
If your VAT return is late, you'll get a 'VAT notice of assessment tax' from HMRC. HMRC will use this to work out how much VAT they think you owe, and ask you to pay it.
As we mentioned in our 'Interest Charges on VAT' section, you have 30 days to tell HMRC if the amount they've assessed you as owing is too low. If you don't do this, they can fine you up to 30% of the extra amount you owe.
You'll be fined on what HMRC calls 'potential lost revenue'. This is simply the difference between the tax HMRC assessed you as owing, and the amount of tax you actually owe.
If you didn't file a VAT return, but paid your VAT in full
It is possible to file a VAT return late and still not pay a surcharge, if you paid your VAT in full by the deadline.
However, as VAT returns should be accurate calculations of how much VAT you owe, it's vital to send them on time, so that you can make sure you're paying the right amount of VAT, and avoid any fines.
This is where investing in a smart accounting system can make all the difference. Rather than being kept in the dark about VAT, and relying solely on an accountant, Ember streamlines the entire process. We raise invoices, collect payments and categorise transactions, so you know exactly how much VAT you owe and when, in real time.
While our handy automation gives you the power to understand VAT and how it works, we've also got fully qualified and friendly accountants on our team, who are always ready to give you expert advice and walk you through what you need to do.
Other VAT penalties
If you complete a VAT return with errors, you may be charged a penalty on the amount of VAT you owe. The amount you'll have to pay as a penalty depends on whether:
- You took 'reasonable care' when completing your VAT return, despite the errors which occurred.
- You made a 'careless mistake' on your VAT return, and therefore did not take reasonable care to complete it correctly.
- You made a 'deliberate mistake' on your VAT return,
- You made a 'deliberate and concealed mistake' on your VAT return.
What counts as reasonable care to HMRC depends on your tax situation. For example, if you're a contractor and you only hire one other person for your limited business activities, HMRC may consider that simple, consistent and careful record keeping and seeking expert tax advice are enough to prove reasonable care.
However, if you're a multi-national company with millions of pounds in annual turnover, you'll need much more complex record keeping systems and tax accountability, to prove that you took reasonable care when doing your VAT return.
Here are three core rules to follow when it comes to VAT returns and proving you took reasonable care.
- Keep records of every sale and purchase you make, so that you can accurately calculate your VAT. Apps like Ember use advanced machine learning to classify your transactions (for example, whether they are VAT-exempt or not), and work out your VAT bill automatically.
- Keep all these records safe. One of the best ways is to do this is digitally. You can use Ember's receipt capture system to store your receipts in the cloud, so they're safe and fully accessible.
- Get tax advice if you're not 100% sure about your VAT and VAT returns. However, HMRC will see you as responsible for the standard of advice you get, so make sure you pick a reputable and fully qualified tax adviser.
Careless mistakes on your VAT return are the opposite of taking reasonable care. For example, if your VAT ended up with errors because you didn't keep records properly and weren't sure how much VAT you charged your customers or paid yourself, this would count as a careless mistake to HMRC.
Making a deliberate mistake on your VAT return means that you purposely entered the wrong information on it, whether that was to underreport the amount of tax you owe (and potentially keep some back for yourself), or inflate the amount of VAT you've paid, to get a refund.
Deliberate and concealed mistake
If you made a deliberate and concealed mistake on your VAT return, this means that not only did you deliberately enter an incorrect amount of VAT on your return, but you took deliberate steps to evade HMRC's knowledge of it. For example, through falsifying receipts or covering your tracks by paying cash and undercharging on VAT.
Depending on the type of mistake on your VAT return, you may receive a penalty as follows:
|Type of mistake||Financial penalty|
|Reasonable care||No penalty|
|Deliberate and concealed mistake||30-100%|
The exact percentage of penalty you'll have to pay depends on a few things. For example, if you make an 'unprompted disclosure' to HMRC, which means that you admit your mistake without knowing that HMRC is going to conduct an assessment, you'll receive less of a penalty than if you made a 'prompted disclosure', which is when you reveal your error because you know HMRC is looking into the issue.
You may also receive a penalty from HMRC if:
- You register for VAT late. If your company started to make a VAT taxable turnover of £85,000 (the threshold for having to pay VAT) and you didn't let HMRC know, you could receive a penalty, as well as interest, for the VAT that HMRC has lost through you not registering.
- You submit a paper VAT return (you can receive a £400 fine for this). The government has brought in a scheme called Making Tax Digital, which means that all VAT-registered business owners have to submit their VAT returns (and, soon, all tax returns) digitally, using third-party software. Accounting solutions like Ember (one of the government's MTD-approved software) can calculate and submit your VAT returns seamlessly on your behalf, giving you the confidence to run your business knowing your tax obligations are covered. You may be exempt from MTD and be allowed to send paper returns if age, disability or remoteness of location means you can't send them digitally. In these cases, you won't receive a fine.
How to appeal VAT penalties
There are several steps to appealing a VAT penalty. They include:
- Getting your case reviewed by an independent officer. When HMRC issues your penalty, they will give you the chance to have the decision reviewed. To make this happen, you need to respond in writing within 30 days of the penalty decision. You'll need to state the decision you disagree with (here, the penalty charge or how much the penalty is), and why you think it's incorrect.
- If you disagree with the outcome of the review, getting an independent tax tribunal to hear your appeal against your VAT penalty. You have to organise this (by writing a letter to the Tribunals Services) within 30 days of the outcome of the review, or HMRC will assume that you accept the review outcome, and are happy to pay the penalties they've charged you.
How to appeal VAT interest charges
You can't actually appeal the decision of HMRC to charge you interest on incorrect or late VAT payments, but you can challenge how much they're charging you. To make this happen, you need to:
- Write to HMRC within 30 days of their decision to charge you VAT interest, and offer any information which you think may affect the decision, and cause them to change it.
- Ask for a review of your case by an independent officer, who hasn't been involved in the decision to charge you interest on your missing or incorrect VAT.
- Appeal to an independent tax tribunal, if you don't agree with the outcome of the review.
Options if you can't pay your VAT
HMRC does have options to support you if you're struggling to pay your VAT, which is why it's so important to get in touch them them if you are. Unfortunately, debts to HMRC don't just go away as they are money owed to the government, so communicating with HMRC the best way to resolve the situation. Some solutions if you really can't pay your VAT, include:
Time to Pay Arrangement
If you're in debt to HMRC over your VAT, you can apply for a Time to Pay Arrangement. If accepted, HMRC will allow you to pay your outstanding VAT in instalments over 6-12 months.
IVA, PVA or CVA
If you're a sole trader, in a business partnership or the director of a limited company, you can apply for one of the above debt solutions, rather than risking bankruptcy due to unpaid VAT and other debts.
Individual Voluntary Arrangement (IVA)
If you're a sole trader with debts to HMRC, you can apply for a government-approved solution (an IVA), which allows you to pay off a certain percentage of your debt – based on what is affordable to you, after meeting your basic living expenses such as groceries and electricity – and get the rest written off after five years. The downsides to IVAs are that they affect your credit score while they're in place, but they do prevent bankruptcy and give your business the chance to recover.
Partnership Voluntary Arrangement (PVA)
Similarly to an IVA, a PVA allows you and your business partner to write off your debt after you've paid off an amount that is manageable to you. However, the partnership would have to be a functioning, viable business, with enough valuable assets to generate cash flow, if given the chance to recover.
Company Voluntary Arrangement (CVA)
A CVA has the same principle of an IVA or a PVA, except that it's for your limited company. A CVA gives you the chance to save your company from liquidation, by paying your creditors (including HMRC if you owe VAT) only a percentage of your debt over a fixed period. In the meantime, you can carry on trading and give your company the chance to become a healthy business again.
COVID-19 deferral of VAT payments
If your business was affected due to COVID-19, you had the chance to defer any VAT payments due for March to June 2020 until the 31st March 2021. You can now pay your deferred VAT in 11 equal instalments during 2021 and 2022, rather than having to pay it all at once, which should help your business stay afloat as much as possible. You have until the 21st June 2021 to enter the scheme.
What happens if you still refuse to pay your VAT after multiple fines?
If you still refuse (or are unable) to pay your VAT after multiple late fines, HMRC has the right to liquidate your limited company, or make you bankrupt if you're a sole trader. However, if you communicate with HMRC as much as possible, you're much more likely to find a solution to avoid this.
How can you avoid paying VAT late in the future?
It all boils down to knowing what you owe and when to pay it. Having an app which gives you a real time view of the VAT you owe takes away the stress of keeping track of payments and obligations while you're trying to run your business or get it off the ground. Ember computes all the sums in the background, deducting the VAT you've paid from what you've charged, so you can pay HMRC on time, every time.
Late VAT payments are sometimes caused by cash flow issues and budgeting difficulties. Our real balance estimation helps you see your real-time cash balance instantly, as well as your tax obligations, so you know what to ring-fence for your tax bills. As customers paying invoices on time are a big part of maintaining healthy cash flow, our smart invoicing system automates the process of raising invoices and chasing debts, streamlining your income so that you have the right amount in your account for your tax obligations.
We also sends you handy tax reminders, so you know when your VAT is due, and will let you know if you're due a refund.
Remember that there is a lot of support with VAT, from extra time to pay it if you're struggling, to accounting support to notify you of your tax obligations and VAT bill, so it doesn't have to be something that you navigate alone.
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