A Guide to VAT Surcharge Rates

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What exactly is a VAT surcharge? Well, in its simplest form, it is a fine. You are penalised for missing a VAT payment or submitting your VAT return late. HMRC calls it a Default Surcharge and defines it as ‘a civil penalty to encourage businesses to submit their VAT returns and pay the tax due on time’.

If you don’t pay your VAT on time or if your payment doesn’t reflect in the HMRC account on time, this will be seen as a default. If you have not submitted your VAT return on time – even if you have nothing to submit or HMRC owes you money – this is also a default.

If your accounting period is up to December 2022, when you default, you are liable for a VAT surcharge. This surcharge is calculated based on a set percentage of the VAT owed on the due date. The first late payment will accrue 2% of the total VAT owing surcharge, increasing incrementally to 5%, 10% and 15%. There is also a minimum surcharge of £30 for calculations at the 10% and 15% rates, and no surcharge on the 2% and 5% rates if this is less than £400.

If your accounting period starts on or after January 2023, a new system is in place. This points-based system gives you a penalty point for every return you submit late until you reach the threshold. Then, you will receive a £200 penalty fine, with another £200 charged per late submission thereafter.

VAT surcharges are also applicable to companies that trade internationally. You will still need to charge VAT and submit a VAT return. If you don’t submit the correct VAT amount, submit your return late, or fail to pay it, you will face penalties from HMRC even if you supply goods internationally.

 Defining VAT Surcharge Rates

Your standard VAT rates are what you are used to charging for your goods or services. This is usually 20% in the United Kingdom and is applied to all businesses and consumers. There is a reduced rate VAT, which is charged at 5% on some goods and services that include home energy or children’s goods, and then there are zero-rated items that aren’t liable for VAT at all, such as some foods and children’s clothing. However, these rates are not the same as the VAT surcharge rates – which are the amounts you will have to pay HMRC if your VAT payments or returns are late.

Global Overview of VAT Surcharge Rates

VAT fines, penalties, or surcharges are not unique to the UK – you can find them in many other countries. For example:

• In China, penalties for late payments and VAT returns potentially face a daily fine of 0.05% of the total amount due, and errors can be punished up to three years later.
• In the United States, every state has its own VAT and tax regulations, but the cost of late or failed VAT returns can be as much as 25% of the tax due.
• In Japan, late filing can cost a company up to 20% of the tax payable, but it can be reduced to 5% if the company submits the return voluntarily.
• In Germany, you will pay 1% per month of the amount owed or, if the VAT return is late, a fine of up to 10% of the assessed amount.
• In France, there is a 5% penalty for late VAT returns on the amount of VAT due plus 10% if paid in 30 days. Failed payments face a 5% levy.
• In Italy, late filing can cost you up to 2,000 Euros or up to 240% of the tax due for annual returns, and errors can see you fined by up to 180% of the difference of what is declared.

Country-Specific VAT Surcharge Rates

While different countries have varying VAT penalties and fines, most hand out stiff penalties to prevent companies from not paying their fees. For example, In South Korea, if a business doesn’t register for tax within 20 days of starting, there is a 1% fine on the value of its products or services, and not submitting a tax return can result in a penalty of up to 40%. India and Canada both charge GST, and their fines are based on non-payment or late returns. For India, it’s up to 10% of the tax due, and in Canada, it is 1% of the balance plus 0.25% per month.

Calculating VAT Surcharge Rates

The VAT penalty system in the UK is designed to minimise fraud, improve VAT return rates and accuracy, and ensure companies pay their VAT on time. However, if you happen to make a mistake and land yourself in the middle of the VAT surcharge system, this is how it can be worked out.

If your VAT accounting period is before December 2022:

• You will receive a Surcharge Liability Notice or a Surcharge Liability Notice Extension. It’s critical not to miss or ignore these! These will let you know when the surcharge period begins and ends, usually 12 months from when you were late or defaulted on payment.
• HMRC does make allowances for small businesses. So, if your annual turnover is less than £150,000, you will get help rather than a fine when you first default. If you mess up again within a year, you’ll get the Surcharge Liability Notice, so don’t do it again.
• You will not be charged if your return is zero for VAT or if HMRC owes you money and you submit your VAT return late. You also won’t be charged if you submit your return late, but you have already paid the VAT on time.
• When you are first charged at the rate of 2% or 5% for your VAT penalty, you won’t pay if the amount is less than £400, but you will get a Surcharge Liability Notice Extension that extends the period of time you have to pay a surcharge, and your surcharge rate will be increased if you default again within that period.  

If your VAT accounting period is from 01 January 2023:

• You will be charged a penalty point for every late VAT submission. When you reach the threshold, you will pay £200 per late submission thereafter. The penalty points threshold for late VAT submissions is 2 points for annual returns, 4 points for quarterly returns, and 5 points for monthly returns.
• You will be charged a VAT late payment penalty if your payment is more than 15 days late and it will increase if it is 31 days or more overdue. The interest fees are:
  • Payments up to 15 days late have no first late payment penalty and no second late payment penalty.
  • Payments from 16-30 days are calculated at 2% of the VAT you owed by day 15 with no second late payment penalty.
  • Payments due over 31 days are 2% of what was owed on day 15, plus 2% of what is outstanding on day 30. Your second late payment penalty is a daily rate of 4% per year on the outstanding balance charged every day from day 31 until the amount is paid in full.

Examples and Scenarios

When dealing with late payments or VAT returns, you need to know how this can affect you financially.

For example, if your VAT payment is up to 15 days late, you should immediately contact HMRC to see if you can be granted a Time to Pay or pay in full. If you are overdue between 16 and 30 days, you should ask for a Time to Pay or pay in full.

You can appeal a late payment penalty by contacting HMRC by post or online to chat about the situation. It’s a good idea to do this early on to avoid further issues or financial distress.

The HMRC includes several examples of how late payment penalties work and how the costs are assessed, which are worth looking into if you’d like a bit more visibility into the process.

Impact of VAT Surcharge Rates on Business Operations

If you become liable for incremental fines and penalties, your business may fall deeper into financial distress. Missing one payment or VAT return can have a cascade effect that can knock into your savings, cash flow, and business reputation. So always consider working with HMRC to resolve any problems upfront, as transparency is far easier on your budget than avoiding the issue. 

Managing Cash Flow and Pricing Strategies 

If you are facing a complex VAT fine situation, you can either chat to HMRC about ways to manage the fees over time, or you can adapt your business pricing to try and recover some of the costs. You should also consider deftly managing your cash flow to reduce the risks and improve your business stability.  

Tools for Managing VAT Compliance

Blue dot provides you with unrivalled intelligence and automation to manage your VAT compliance and avoid the risks associated with late payments and returns. Our AI-driven VAT compliance platform analyses 100% of your employee-driven and aligns them with the most current tax regulations per country, enabling precise VAT eligibility and effortless compliance.

Mastering VAT Surcharge Rates for Business Success

Now that you have a clear picture of VAT surcharge rates and the penalty system, take advantage of our tools to calculate and manage your VAT more effectively. Blue dot’s technology-driven solution can also provide your business with a centralised, standardised, and digitalised platform, giving you full control and visibility of all your transactions and reducing audit risks.