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Advice for directors who have been assessed for VAT surcharges

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Why would HMRC issue a VAT penalty?

A VAT surcharge, also known as a VAT penalty, will be issued by HMRC over consecutive late tax payments and calculated according to a percentage of the total tax due. If HMRC expects to impose a VAT penalty, they will notify you with a Surcharge Liability Notice before adding it to your tax bill.

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Understanding VAT surcharges and how they are calculated

As time goes on, more and more businesses are struggling to pay VAT on time, and if you are late paying VAT, it would be a good idea to understand how VAT surcharges are calculated and exactly what they can mean for your business. The one thing you must know is that there is only so far you can go with HMRC before they start penalising you for delinquent payments. We can help, but you must contact us before your taxes are due!

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What Are VAT Surcharges?

Sometimes referred to as VAT penalties, VAT surcharges are fees added to your late taxes based on certain criteria. What you will have to pay is calculated by multiplying a percentage times the amount overdue. These are called ‘defaulted payments’ and each time you default the percentage goes up accordingly. The first time a business pays late there will be no surcharge but from the second late payment, and not necessarily the consecutive payment, the percentage rises.

How Much Will VAT Surcharges Be for Late Payments?

Here is where it gets a bit confusing, and because of this, it really is advisable to speak with an insolvency specialist to help you to better understand the VAT surcharge chart. Actually, HMRC doesn’t want to force businesses into further debt so there is some amount of leeway in the very beginning. In fact, the first warning comes in the form of a ‘help letter.’ There will be no surcharges at this time unless you miss a second payment within a twelve-month timeframe and then you are issued a formal warning letter and are entered into the surcharge system.

Breakdown of Subsequent VAT Surcharges

As mentioned, the first default will be accompanied by an offer of help. The second default within a period of 12 months of receipt of that letter will not have a surcharge either but you will be issued what is called a Surcharge Liability Notice. At this point you can no longer fly under their radar and if you are having trouble paying VAT, now is the time to seek professional guidance. Here is a brief breakdown of subsequent VAT surcharges:

  • 3rd Default – 2pc of VAT due unless that amount is not greater than £400
  • 4th Default – 5pc of VAT due unless that amount is not greater than £400
  • 5th Default – 10pc
  • 6th Default – 15pc

Keep in mind that each of those amounts is contingent upon the most recent letter of default. If the current default is for a time period greater than a year since the most recent default, the process starts all over again.

The Importance of Submitting a VAT Return

Some companies make the mistake of failing to file a return because they haven’t the money to pay the amount due. This is where HMRC will step in and ‘estimate’ an amount they assume you owe and they will then base a surcharge on that amount. If a company still fails to submit a correct return, HMRC has the authority to increase the amount of VAT they assume you owe and the surcharge could rise accordingly. It really is in your best interest to file or speak with them even if you cannot pay your taxes!

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If your company is struggling with unmanageable debts, squeezed cash flow, or an uncertain future, you are far from alone. We speak to company directors just like you every single day, and we are here to give you the help and advice you need.
Call our team today on 0800 644 6080

Rather than taking a chance of owing VAT surcharges, speak to the insolvency team at Real Business Rescue. We can either help to negotiate a payment plan with HMRC or perhaps arrange financing so you aren’t late paying the taxman. The bottom line is that the longer you procrastinate, the harder it will be to catch up those arrears.

Contact us before the situation is out of control. We can help you, but only if we know you are in trouble!

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