In this section:
- Returned goods, credit notes, debit notes and VAT
- Bad debts: how to reclaim the VAT
- Payment problems, assessments, penalties and appeals
- Corrections to mistakes and errors, and making adjustments
- Visits by VAT officers
- Penalties for mistakes and delays with your VAT
- Questions about VAT: writing to HMRC to get them answered
Penalties for mistakes and delays with your VAT
You must submit your VAT Return and pay any VAT you owe by the due date. If you don't, you may be surcharged a percentage of your unpaid VAT. If you continue to submit or pay late, you will be charged a higher percentage of your unpaid VAT. If you fail to submit a return at all, and HM Revenue & Customs (HMRC) assesses you for the period but you fail to tell them within 30 days that your true liability was actually greater than the assessment, you could face a penalty.
If you submit an inaccurate return that shows too little VAT due, or claims too much repayment, you could be liable to a penalty.
This guide explains what happens if you miss VAT submission and payment deadlines and what you should do to avoid financial penalties. If you have difficulty paying your VAT, you should still send in your return on time and then contact HMRC about your payment problems.
On this page:
- Surcharges if you miss VAT Return or VAT payment deadlines
- When you will not be surcharged for late submission or late payment
- Appealing against a surcharge
- What to do if you are having trouble paying VAT
- What to do if you know you cannot submit an accurate return
- Mis-declaration penalties
- Late registration penalty
Surcharges if you miss VAT Return or VAT payment deadlines
You must submit your VAT Return and pay any VAT by the due date. If HMRC receives your return or VAT payment after the due date, you are 'in default' and may have to pay a surcharge in addition to the VAT that you owe.
The first time you default, you will be sent a warning known as a 'Surcharge Liability Notice'. This tells you that if you pay late ('default') again during the following 12 months - known as your surcharge period - you may be charged a surcharge.
If you submit or pay late again during your surcharge period you may have to pay a 'default surcharge'. This is a percentage of your unpaid VAT. If you don't submit a correct return, HMRC will estimate the amount of VAT you owe and base your surcharge on that amount (known as an assessment).
Your first surcharge will be 2 per cent of your unpaid VAT.
You will be sent a 'Surcharge Liability Notice Extension' that extends your surcharge period for an additional 12 months. Each time you do not submit or pay your VAT on time, your surcharge period will be extended for a further 12 months.
If you continue to make late payments you will be charged increasing penalties of 5 per cent, 10 per cent and 15 per cent of your unpaid VAT. If you continue to fail to submit a correct return HMRC may increase the estimated amount of VAT you owe them and base the increased penalties on that amount.
See the section in this guide on mis-declaration penalties to find out what can happen if you persistently submit your return or pay your VAT late.
Find out about VAT submission and payment deadlines
When you will not be surcharged for late submission or late payment
You will not be surcharged for late submission and/or late payment if:
- you submit a nil return late (for example, where you have not charged VAT nor paid VAT)
- you submit a return late when you are due a VAT repayment
- you submit a return late when you have paid your VAT on time
However, HMRC will record a default and issue a surcharge liability notice extension to extend your surcharge period because of the late return, but they won't increase the rate of surcharge.
If you submit a return late or pay late for the first time and your turnover is less than £150,000 a year, you will not be surcharged, but will receive a letter offering help and support. If you default again within 12 months you will formally enter the default surcharge system.
If you have what HMRC may accept as a reasonable excuse in your particular circumstances such as a computer breakdown, loss of records or illness, you will not be surcharged, and they won't either extend your surcharge period or increase the rate of surcharge.
More about what HMRC considers to be a reasonable excuse in VAT Notice 700/50
You also won't be charged a penalty if you are being charged at the 2 per cent or 5 per cent rate and HMRC calculated the surcharge to be less than £400. HMRC will, however, record a default, issue a surcharge liability notice and increase the rate of surcharge if you default again within the surcharge period.
Appealing against a surcharge
If you think you should not have been surcharged, or if you think that the amount you have been surcharged is too high, you can ask HMRC to take another look at the charges and/or your 'default liability'. You must do this within 30 days of receiving your surcharge notice or extension. You can also appeal against the surcharge or the default liability to a VAT tribunal.
Contact HMRC to ask them to reconsider a surcharge
Find out how to appeal against decisions made by HMRC about your VAT affairs
What to do if you are having trouble paying VAT
If you have difficulty paying your VAT, you should still send in your return on time and then contact HMRC about your payment problems.
What to do if you have trouble paying VAT
Contact HMRC if you have a payment problem
What to do if you know you cannot make an accurate return
If you know that you will be unable to make an accurate return, you should contact HMRC as soon as possible. If they consider that you have a good reason, you may, exceptionally, be allowed to estimate your input tax and/or output tax.
If you are allowed to use estimated figures, and your return along with any payment reaches HMRC by the due date, you will not be in default. If you ask for approval to use estimated figures once the due date is passed, HMRC will consider your request but it will not affect any default which has already been recorded.
You must establish the correct amount of VAT. Any resulting adjustment must be included on the return for the next period. If HMRC agrees that this is not possible, you may include any revisions in the following period at the latest.
Mis-declaration penalties
When you might face a penalty
If you submit an inaccurate VAT Return that shows too little VAT due, or claims too much repayment, you may be liable to a penalty.
If you don't submit a return at all, and HMRC makes an assessment that is actually lower than your true liability for the period, then you have to tell them within 30 days. If you don't, you could be liable to a penalty.
The different types of penalty are:
- a mis-declaration penalty
- a warning notice for repeated mis-declaration penalty
- a repeated mis-declaration penalty
These penalties apply if you show significant or repeated lack of care in preparing your return.
These penalties do not imply any dishonesty or any intention to evade tax. Conduct involving dishonesty is penalised by the civil evasion penalty.
Find out what to do if you receive an assessment because you didn't submit a return
More about what to do if you discover a mistake on a return you've already submitted
More about civil evasion penalties in VAT Notice 730
When you won't face a penalty
In most cases HMRC won't issue a penalty in the following circumstances.
Reasonable excuse - you won't face a penalty if you can demonstrate that you have a reasonable excuse for making the mis-declaration. For example, if you can show that your conduct was that of a conscientious businessperson who accepted the need to comply with the VAT regulations, that may be a reasonable excuse. It's not enough to say that you were honest and acting in good faith.
Genuine mistakes, an inability to pay, or the reliance on someone else who failed to perform a particular task are not reasonable excuses. Nevertheless, you might be able to get a reduction in the penalty if there are mitigating circumstances that fall short of a reasonable excuse - but simply acting in good faith, or not being able to pay, won't get you any reduction.
Voluntary disclosure - you won't face a penalty if you discover and disclose the mis-declaration voluntarily before HMRC commence making enquiries into your VAT affairs.
Period of grace - if HMRC discover a mis-declaration on your most recent return on or before the due date for the next return, they won't usually issue a penalty. This period of grace depends on the type of return:
- monthly returns - two months
- quarterly returns - four months
- annual returns - 14 months
- final returns - three months after the due date
Nil tax - if an under-declaration is corrected by an over-declaration for the same transaction in an adjoining period, HMRC might not issue a penalty.
Small penalties - HMRC won't usually issue a mis-declaration penalty that comes to less than £300, or a repeated mis-declaration penalty of less than £30. They will still issue a larger penalty, however, even if it gets reduced below those figures due to mitigating circumstances.
Find out what to do if you discover a mistake on a return you've already submitted
More about correcting mistakes and errors, and making adjustments
How penalties are calculated
Step 1
Penalties are worked out as a percentage of something known as the penalty base. HMRC used different methods to calculate the penalty base, depending on the circumstances.
- You submitted an inaccurate return. The penalty base is your output tax (the amount of VAT you owe to HMRC that should be in Box 3 of your return) added to your input tax (the amount of VAT you're reclaiming from HMRC that should be in Box 4 of your return), for the period you submitted the inaccurate return for.
- You didn't submit a return and HMRC assessed you for the period, but you didn't tell them within 30 days that the amount you actually owed was more than they assessed you for. The penalty base is the net VAT due to HMRC for the period (the figure that should have appeared in Box 5 of your return) - that is, output tax minus input tax.
Step 2
In this step, HMRC looks at the size of your mis-declaration and the size of the penalty base to work out whether you will receive a penalty, and what kind of penalty it is. Two tests are applied.
- Your mis-declaration is £1 million or more, or equal to 30 per cent or more of the penalty base. You may receive a 'mis-declaration penalty'.
- Your mis-declaration is £500,000 or more, or equal to 10 per cent or more of the penalty base. If this is your first mis-declaration, you may receive a warning, known as a 'repeated mis-declaration penalty warning notice', on form VAT 670. But if you make two more mis-declarations that meet this test within the next eight VAT periods (usually two years - it depends on your VAT periods), then you may receive a 'repeated mis-declaration penalty'.
Although there are two types of penalty, any mis-declaration will only receive one penalty. If your mis-declaration meets both tests, you'll only be charged the 'mis-declaration penalty'.
Step 3
For both types of penalty, the amount of the penalty you'll be charged is 15 per cent of the amount of the mis-declaration.
Step 4
The penalty can be reduced in some circumstances.
More about when penalties might be reduced in VAT Notice 700/42
What happens if you are liable to a penalty
HMRC will tell you in writing if they've charged you a penalty. They'll explain:
- which mis-declaration made you liable to a penalty
- the period the penalty applies to
- the tax amount liable to penalty
- the amount of any mitigation allowed
- the amount of any penalty previously assessed for the period
- the total amount of penalty for the period
- how and where to make payment
If you don't agree with the penalty, you can appeal.
Find out about paying interest on late payment or overclaims of VAT
Find out how to appeal against decisions made on your VAT
More about the VAT mis-declaration penalty in VAT Notice 700/42
Late registration penalty
If you don't tell HMRC at the right time that you should have registered for VAT, then you may face a late registration penalty.
Read our guide about what happens if you register late for VAT
