The fines imposed by HMRC for the late submission of income tax returns are well publicised. Less publicity is given to the fines that are imposed for the late submission and/or payment of VAT returns. These fines are known as” default surcharges”.
The default surcharge system operates as follows. The first default will result in HMRC issuing a Surcharge Liability Notice, which remains in force for 12 months. Further defaults within this 12 month period will be subject to a 2%, 5%, 10% or 15% penalty, the penalty rate increasing with each late return. Once a business has received a surcharge liability notice it only escapes the penalty system by submitting and paying VAT returns on time for a continuous period of 12 months. With HMRC increasingly placing businesses it deems to present a ‘risk’ on monthly, rather than quarterly, VAT returns the potential for 15% penalties can be realised very quickly.
If you know in advance that you will not have the necessary funds and you contact HMRC before the VAT return is due, HMRC will not impose a surcharge provided that the return itself is filed on time and a time to pay arrangement is agreed.
Key points to consider are:
It may be worth contesting a Surcharge Liability Notice even though it only puts a business on notice of a future pending surcharge (you may have a better reason for this late return than the subsequent return that triggers a surcharge).
It is possible to appeal against a VAT default surcharge to the VAT Tribunal.
An important point highlighted in the Courts recently is that a time to pay arrangement needs to be negotiated for each return that will be paid late if a surcharge is to be avoided, a business cannot assume that because it has already explained its circumstances to HMRC they will automatically allow time to pay and withhold surcharges on future returns.
If you have any outstanding VAT liability it is essential to ensure that any payments you make against a subsequent VAT return are explicitly stated to relate to that return. If you do not HMRC may set that payment against the earlier debt and then penalise a further default.
Whichever payment method you use, you should always make sure that cleared funds will be in HMRC’s account by the due date, taking into account weekends and bank holidays.