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Late VAT Payments: Advice for limited company directors

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What are the penalties for late VAT?

HMRC will levy penalties of up to 15% of the value of the VAT which remains outstanding for companies who repeatedly default on paying what they owe. Companies with a turnover below £150,000 will be given a grace period, and will not receive a penalty for their first two defaults in a 12 month period. This leeway is not given to companies with a turnover in excess of £150,000.

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What happens when you miss a VAT deadline?

If you are late paying VAT to HMRC, you will face either a financial penalty or alternatively a Surcharge Liability Notice depending on your VAT payment history and whether you are a first time or a repeat offender.

First Default: A Reminder Letter

The first thing to bear in mind is that HMRC does allow some amount of ‘forgiveness’ and if this is your first late payment of VAT within a 12 month period you may well find that you do not accrue surcharges at all.

Instead you will be sent a reminder letter advising you that the owed VAT amount is now late and that you need to bring your account up to date. If you do not adhere to this warning then HMRC will take further steps to obtain payment.

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In terms of penalties for late VAT payments, the magic number to keep in mind is £150,000. If a company’s turnover is greater than that amount, they are only provided one ‘grace’ period in which no surcharges will be attached, whereas a company with a smaller turnover is first offered help and after the second default they are served with a Surcharge Liability Notice. If your company has been issued a Surcharge Liability Notice, it is vital to understand the consequences if you don’t take steps to pay the taxman.

Second Default: The Surcharge Period

A Surcharge Liability Notice is sent to companies with turnover below £150,000 upon their second VAT default. This letter notifies you that you have been placed in what is known as a ‘surcharge period’ which you will remain in for the next 12 months. If you miss another deadline within that timeframe you may begin to accrue fines depending on your company’s turnover, and additionally the surcharge period will be extended by a further 12 months.

Continuing to pay your VAT late will see penalty charges increase as HMRC grow more and more tired with your failure to keep on top of your tax obligations. So when paying the VAT late what happens when you miss a deadline? The answer to that depends on why the deadline was missed and how far in arrears you currently are.

The Amount of Turnover Affects Late VAT Payments

The amount of the surcharge is in direct relation to the amount of VAT which remains outstanding during that accounting period and is also affected by the level of your company’s annual turnover.

Defaults within 12 monthsSurcharge if annual turnover is below £150,000Surcharge if annual turnover is £150,000 or over
2NA2% (0% if below £400)
32% (0% if below £400)5% (0% if below £400)
45% (0% if below £400)10% for £30 (whichever is highest)
510% for £30 (whichever is highest)15% for £30 (whichever is highest)
6 +15% for £30 (whichever is highest)15% for £30 (whichever is highest)

 What can I do to prevent late VAT payments?

There are always reasons behind a missed or late vat payment, and it is vital you get to the root of what is causing your inability to pay as a matter of urgency. Paying the vat late can hint at deep-rooted financial concerns which could have a disastrous impact on the viability of the company as a whole should this continue without redemptive action being taken.

A lack of available money with which to pay the VAT typically hints at wider company cash flow issues. As VAT is collected by a company from its customers on behalf of HMRC, in theory the money should already be there to pay the bill when it arrives. In many instances where a company is unable to pay, it is because this money has not been adequately ringfenced for the purpose intended and instead has been used to meet other business expenses and overheads.

What are my options if I have fallen behind on paying VAT?

If you are unable to find the funds to bring your account up to date immediately, one option is to speak to HMRC about the possibility of a Time to Pay (TTP) arrangement. This lets a company settle its tax arrears through a series of monthly repayments rather than having to pay the whole amount at once.

TTPs typically last no longer than 12 months and during this time you will have to keep up with your ongoing VAT and tax requirements in addition to the agreed TTP repayment figure to cover your VAT arrears. Due to the sums involved a TTP can be a great way for a company to recover from a temporary setback, however, if financial concerns are still present then the company may struggle to keep on top of the payments required to sustain such an arrangement.

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Why Professional Guidance Can Help When Paying VAT Late

Unfortunately, there are a number of different problems a company may be experiencing when dealing with late VAT payments and HMRC isn’t always as forgiving as they should be or could be. Sometimes it is necessary to explain to them the circumstances which caused late filings or payments and there are very few reasons which they find acceptable.

For example, a fire resulting in the loss of all the company’s records would likely be just cause, but barring any catastrophic event, HMRC expects payment when it is due. A licensed insolvency practitioner can often intervene on your behalf to provide a bit of extra time and liaise with HMRC on your behalf.

Alternatives to a Time to Pay

In instances where a TTP isn’t possible, perhaps through a lack of available funds or HMRC being unwilling to accept the payment plan proposed, a licensed insolvency practitioner will be able to talk you through the options which remain and recommend the most appropriate course of action.

This could involve a formal insolvency procedure to facilitate a turnaround of the company’s fortunes; this may be done through a process known as a Company Voluntary Arrangement (CVA). A CVA allows a company the opportunity to restructure its current liabilities and negotiate with creditors to come to a mutually beneficial arrangement which allows the company to continue trading while dealing with its debts in an affordable manner. All types of creditors can be incorporated into a CVA, including HMRC, meaning VAT arrears will be taken care of as part of the process.

Alternatively, access to a form of business funding could assist with your ongoing cash flow or provide the vital injection of finance needed to get your company back on track.

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Beware of Sending Up Red Flags

One of the reasons why it is so important to seek professional assistance if your company is unable to pay VAT on time is because this signals to HMRC that you may be trading insolvent. If HMRC believes this to be the case, they may look to start winding up action against your company to prevent further debts building by forcing you to stop trading.

Insolvency practitioners can help circumvent potential problems and put a robust plan in place before the situation escalates out of control. Whether you want to do everything possible to save your company, or look at ways of closing it down in an orderly manner, Real Business Rescue can help. Our nationwide team of licensed insolvency practitioners are on hand to provide to expert help and advice you need to make the best decision for you and your company going forwards. Call today to arrange a free no-obligation consultation.

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