Late VAT penalties – How can these be avoided?
By Sarah Hill,
Business Services Senior Manager
Businesses submitting late VAT filings and VAT payments face much harsher penalties than perhaps they realise.
The introduction of the VAT penalty points system in 2023 means that repeated delays can lead to fines and extra interest incurred by businesses.
HMRC penalises both late filings and late payments so it is worth understanding how each is handled.
Late filing penalties
Each late VAT return earns one penalty point for a business, with reaching the penalty threshold triggering a £200 penalty from HMRC.
The maximum number of points is dependent on how frequently you file your tax returns.
For example, monthly returns have a limit of five points, quarterly is up to four points and annual returns mean a maximum of two points.
However, these points are not permanent and your compliance record can be wiped clean.
If you submit all required VAT returns on time for a continuous period of 12 months and all outstanding returns from the past two years have been submitted, you will be cleared of points and able to start again.
Late payment penalties
The late payment of VAT is treated as separate from late VAT submission, so you can face penalties for late payment even if you file on time.
If VAT is still unpaid between 16 and 30 days after the due date, you can be charged a two per cent penalty that rises to four per cent after 31 days or more.
Late payment interest of four per cent also starts accruing from the day VAT becomes overdue up until it has been paid in full.
Strategies for staying compliant
Avoiding late VAT penalties can help with gaining greater control over your tax liabilities as costs are brought down when your business remains compliant.
For example, meeting VAT deadlines allows you to accurately forecast tax payments and budget effectively, without the worry that costs incurred will leave your business short of cash.
Not missing payments supports a good compliance history, which can make managing future tax obligations simpler and avoid increased scrutiny from HMRC.
Given how burdensome VAT penalties can be for an SME, here are five tips for making sure you don’t miss a deadline.
- Automated reminders
A simple yet effective method for making sure your business pays on time is scheduling reminders ahead of both return-submission and payment deadlines.
- Direct Debit
If eligible, setting up direct debits or a standing order that will clear by the due date means payments will not be missed.
- Organising a Time to Pay arrangement
Being proactive and reaching out to HMRC early and before penalties have been triggered can give you the opportunity to waive late payment fines.
- Monitor cash flow around VAT due dates
By having a cash reserve dedicated to VAT payments, you have a contingency to cover liabilities in months where income is slower.
- Submit a return even if it is only partially paid
Submitting your VAT return on time helps avoid a fine, even if you cannot pay the full amount owed.
By contacting HMRC as early as possible, you may be able to arrange a Time to Pay arrangement, which could minimise or avoid payment penalties.
