A Guide to VAT Surcharge Rates
The Blue dot Team
The Blue dot Team
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.
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.
VAT fines, penalties, or surcharges are not unique to the UK – you can find them in many other countries. For example:
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.
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:
If your VAT accounting period is from 01 January 2023:
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.
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.
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.
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.
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.