Demystifying VAT Late Payment Penalties: What You Need to Know

A late VAT payment is considered any VAT payment that is made more than 15 days past the due date, and this can prove quite costly to your business.

Why?

Late VAT payments can cost you in fines, which accumulate and put your cash flow under pressure. They also put your business straight into the new VAT late payment penalty system that started on January 1, 2023. However, it’s important to note that you are still liable for VAT surcharge payments if your business is late on payments before December 31, 2022.

This new system is replacing very expensive VAT Surcharges, but it still accrues fines and places your business reputation at risk. It’s important to understand exactly how this penalty system works and the impact it can have on your business.

Understanding VAT Late Payment Penalties

You will be liable for penalties if you do not pay your VAT on time. They apply to any VAT monies owed to HMRC except VAT payments on account or payments towards the VAT Annual Accounting Scheme. These have different regulations that apply.

If you are late or know you’re not going to manage a VAT payment, you can contact HMRC and work together on a payment plan. If you do this, then you can completely bypass fines and penalties as you’ve been upfront about your issues from the outset. HMRC calls this payment plan a Time to Pay arrangement, and it will cover everything you owe to HMRC.

The new system that replaced the VAT surcharge system is broken down into two parts – VAT returns and VAT payments. If you submit a VAT return late, then you are subject to the new points system which allocates points based on the number of missed returns. Once you reach a certain points threshold, you will need to pay a fine. If you are late paying your VAT, then you will need to understand the late payment system and how subsequent late payments and length of time between these payments affect your overall fines.

In its simplest form:

• A late payment up to 15 days past the deadline won’t be liable for a penalty or a fine, no matter how many times you do this.
• You won’t be liable for late payment fines if you enter a Time to Pay agreement.
• If your VAT payment is 16-30 days late, you will be liable for a penalty of 2% of the amount of VAT you owe, and you will not be liable for a second late payment penalty.
• If your VAT payment is more than 31 days overdue, you pay 2% of what was outstanding as of day 15, and 2% of what is still outstanding at day 30. You will also be liable for a second late payment penalty calculated at a daily rate of 4% per year on what you owe and you will be charged every day until you have paid the remaining amount in full.

Common Reasons for Late VAT Payments

You may not think it is easy to be late on a VAT payment, but it’s not that hard to make a mistake. One of the most common causes of this is a lack of communication in the business or systems that are not sufficiently updated, leading to missed payments. Accounts Payable (AP) has done the work, but nobody approved the cost.

Another reason you may miss a payment is because your cash flow has been affected. This could be due to VAT bad debt, tough economic conditions, or even poor customer payments. In this instance, it’s a really good idea to communicate early and often with HMRC to mitigate or minimise the fines.

Another common reason is you simply forgot! You may be busy, the month has flown by, and next thing you know, you’ve missed the deadline. It’s easy to forget but just as easy to resolve it. So pay the money, contact HMRC, and see how you can minimise the impact.

The Financial Impact of VAT Late Payment Penalties

Even though it can be easy to forget to pay VAT, it can be very hard to clamber out of the debt it puts you in if you don’t pay beyond the 31-day window. The costs you incur on a steady, daily basis, can accumulate to the point where they put your business under immense financial pressure.

This is made even harder when you consider how much you owe for late VAT payment, plus the fines are also subject to interest. This is worked out at the Bank of England base rate, which has been 6% since January 2023.

Now, you’re adding the cost of the VAT fine plus the interest charged on your late payment, and you can see how these costs can escalate and affect your business.

Legal Consequences of Not Paying VAT on Time

Non-compliance with VAT late payments and regulations can result in serious ongoing fines, potential civil action to recover the debt you owe, and increased scrutiny by tax authorities – which can raise the risk of deeper audits.

Tips to Avoid VAT Late Payment Penalties

If you want to avoid late VAT payment penalties you should consider:

• Using a digital VAT solution designed to help you optimise and manage your VAT effectively.
• Diarise the dates of your VAT returns and payment dates so they are easy to remember and check.
• Always set aside your funds to ensure you have enough to pay VAT.
• Submit your payment as soon as you know how much to pay so you are always ahead of your VAT payment dates.
• Immediately contact HMRC should you realise you cannot pay and organise a Time to Pay arrangement.

How Blue dot Can Help You Stay Compliant

Blue dot provides the world’s leading deep AI-led tax compliance platform that enables centralised, digitalised and standardised VAT Management. Our patented technology provides a contextual and transparent transactional story for every employee-driven transaction and dynamically ensures compliance with all tax rules and regulations in every country. Our online VAT Reclaim Calculator enables you to discover the reclaimable VAT and GST hidden in your employee expenditures, and our VATBox solution helps make your compliance effortless while maximising your VAT reclaim opportunities.