Avoiding VAT Default Surcharges

The late submission of a VAT return and/or payment can result in a default surcharge penalty being raised by HMRC.  The penalties start off at 0%, however they increase to 15% of the net VAT due for the quarter.  If the reason for late submission is cash flow issues the addition of a surcharge is salt in the wound.  It is therefore important that all possible measures are taken to avoid surcharges.  The following are some tips which will hopefully help.


Pay current VAT return before clearing existing VAT debts
If your business has an existing VAT debt you may have had to negotiate a time to pay arrangement with HMRC.  However don’t agree to an arrangement which will make it difficult to pay the forthcoming VAT returns.  This could lead to further surcharges and just adds to the overall debt.  HMRC will take into consideration that current liabilities must be met.


Be careful with part payments
Rather than waiting to pay the VAT return liability on the due date you might decide to pay lump sums before the due date as and when cash flow allows.  Although the total of the payments may clear the current VAT return liability, if you have an existing VAT liability the payments will be allocated against the earlier debt. Again resulting in another surcharge!

Try not to use VAT as a way to finance business
As VAT payments are usually only due every three months it is easy for VAT receipts received to be swallowed up in day to day cash flow so by the due date the funds aren’t available to pay the VAT return.  Taking into consideration that surcharges rise to 15% quite quickly this can be an expensive way to maintain cash flow.  It would therefore be recommended that the net VAT liability is monitored through the VAT period it conjunction with cash flow.  If possible accrue for the liability through the VAT quarter.  However if it becomes apparent that current cash flow is tight, and after paying other liabilities such as salaries and suppliers, the VAT liability won’t be met then consider whether other financing options are available which could be cheaper than the possible 15% surcharge.

Points to note
Default surcharges start at 0%, then 2%, 5%, 10% and 15%
Once a default surcharge is raised four VAT returns need to submitted and paid on time to be removed from the cycle.

Default surcharges can be appealed if there are mitigating circumstances.  Always consider an appeal as there is no negative impact if an appeal fails.