VAT late payment penalties

HMRC are now fully enforcing their new VAT late payment penalty regime.

This is in many ways stricter and harsher than the VAT default surcharge that was in place before, in that there is no allowance for the occasional late payment to be penalty-free. The old system was one of increasing surcharges for multiple occasions of late payment, but the new system does not discriminate and applies penalties regardless of the taxpayer’s previous record.

How VAT late payment penalties now work:

• If payment is 16 days or more overdue, a penalty of 2% of the amount outstanding will be applied.
• If payment is 31 days or more overdue, a further penalty of 2% of the amount still outstanding at that point will be applied.
• From 31 days overdue until payment is received in full, HMRC will charge further daily penalties based on 4% per annum of the outstanding balance.

In addition to the above, HMRC will also charge interest at 2.5% above the Bank of England base rate from the first day that payment is overdue up to the date when payment is received in full.

If you are unable to pay your VAT on time, it can be possible to avoid penalties by making a Time to Pay arrangement with HMRC, but this must be done before the date when the penalty would become due. It is important to keep to the terms of any Time to Pay arrangement, as otherwise it may be cancelled, and penalties charged as if the arrangement had not been made.

Penalties can be cancelled if there is a ‘reasonable excuse’ for late payment. Forgetting to pay or not receiving a reminder from HMRC are not considered reasonable excuses. HMRC have no obligation to issue reminders, so a penalty notice may be the first communication received.

We would strongly recommend that all VAT-registered businesses set up a direct debit for paying their VAT bills, as forgetting to pay could incur significant costs.

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Please note: This article is provided for information only and was correct as at time of writing (09/05/24). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.