It is worth reminding ourselves that VAT does not affect profit. It is only an amount that you accumulate on behalf of HMRC. However it does affect cash flow which is why it is sometimes paid late.
HMRC have an increasingly tough penalty regime for late submission of a VAT return or payment of VAT (either of these is classed as a ‘default’), based on your history of payments. It is well worth being aware of how it works, which currently is as follows:
- 1st Default – No surcharge and no further action provided you don’t default again within the next 12 months;
- 2nd Default – No surcharge but you enter a 12 month surcharge period for if you default again;
- 3rd Default – 2% or no surcharge if it is less than £400;
- 4th Default – 5% or no surcharge if it is less than £400;
- 5th Default – 10% or £30, whichever is more;
- 6th Default (or more) – 15% or £30, whichever is more.
To extract yourself from a default surcharge period you must submit returns and pay VAT on time for a 12 month period.
The percentages are based on the VAT due for the quarter so these can equate to very high levels of penalties if a large firm starts to regularly default.
Finally, HMRC are looking to introduce a ‘penalty points’ based system for 2023 so there will be more news on this once the detail is known. The moral is to pay your VAT on time, every time!