VAT – beware the default surcharge

A default surcharge is a penalty levied on businesses that submit late VAT returns. VAT registered businesses are required by law to submit their returns and make sure that payment of the VAT due has cleared to HMRC’s bank account by the due date.

There is no penalty for a first offence, however a business that submits a VAT return late is issued with a surcharge liability notice that begins on the date of the notice and ends twelve months from the end of the latest period in default.

If further VAT returns are submitted late during this period, a penalty based on a ‘specified percentage’ is charged. This increases with each default. The penalties start at 2%, increasing to 5%, 10% and then to a maximum of 15%. The 15% penalty can be charged more than once if the business continues to submit late VAT returns.

There are de-minimis levels below which no surcharge will be levied. It takes a full 12 months after the default period for the default surcharge clock to be ‘reset’.  The default surcharge penalty can result in what appears to be disproportionate penalties. However, the courts have mainly supported HMRC’s penalty regime – stressing that the rules are clear.

Planning note:

There are occasions when a business can appeal a default surcharge notice, but only if they had a reasonable excuse for submitting a late VAT return. The "reasonable excuse" criteria are limited, but we would happily provide an opinion on a possible appeal and support your application if the circumstances warranted such an appeal.

Posted in Value Added Tax

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