Penalties and interest for late filing and late payment

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Late filing penalty

  • The penalty works on a points based system.

  • Each time a VAT return is submitted late, a business incurs 1 penalty point.

  • Once a business has reached the penalty threshold of 4 points, a £200 penalty is charged.

  • Any subsequent late VAT returns also incur a £200 penalty.

  • The points normally expire after 2 years. However, they do not expire once the penalty threshold of 4 points has been reached.

  • To reset the points to 0 after reaching the penalty threshold of 4 points, a business has to submit 4 VAT returns on time (over a period of 12 months).

Late payment penalty

  • No penalty is charged if the VAT liability is paid within 15 days of the due date.

  • A 2% penalty is charged if the VAT liability is paid within 16 and 30 days of the due date.

  • A 4% penalty is charged if the VAT liability is paid more than 30 days after the due date.

  • In addition, where the VAT liability is paid more than 30 days late, a daily penalty at an annual rate of 4% is charged beginning after the initial 30-day period.

Late payment interest

Late payment interest is payable at the rate of 6.5% p.a. from the due date until the date that the VAT liability is actually paid.

Illustration:

Anaya has submitted her VAT returns and paid her VAT liability as follows:

Quarter ended VAT due Days late
30/6/23 22,000 7
30/9/23 29,500 45
31/12/23 24,000 21
31/3/24 31,000 2

For the quarter ended 30/6/23

Late filing penalty

Submitted the VAT return late -  incurs 1 penalty point

Late payment penalty

VAT liability paid within 15 days so no late payment penalty

Late payment interest

22,000 x 6.5% x 7/365 = 28

For the quarter ended 30/9/23

Late filing penalty

Submitted the VAT return late -  incurs 1 penalty point (2 points in total)

Late payment penalty

VAT liability paid after 30 days so penalty is calculated at 4% along with the additional daily penalty at 4% 

Penalty - 29,500 x 4% = 1,180

Additional daily penalty - 29,500 x 4% x 15/365 = 49

Late payment interest

29,500 x 6.5% x 45/365 = 236

For the quarter ended 31/12/23

Late filing penalty

Submitted the VAT return late -  incurs 1 penalty point (3 points in total)

Late payment penalty

VAT liability paid in 21 days so penalty is calculated at 2%

24,000 x 2% = 480

Late payment interest

24,000 x 6.5% x 21/365 = 90

For the quarter ended 31/3/24

Late filing penalty

Submitted the VAT return late -  incurs 1 penalty point (4 points in total) so Anaya has to pay £200 penalty

Late payment penalty

VAT liability paid within 15 days so no late payment penalty is incurred.

Late payment interest

31,000 x 6.5% x 2/365 = 11

Errors on a VAT return

If a VAT return is submitted incorrectly, the following penalties and surcharges will apply.

Disclosed by the taxpayer

Errors disclosed by a taxpayer are either defined as small or large. 

If an error occurs, then default interest and a standard penalty may be payable. 

These depend on whether an error is defined as small or large.

Default interest is interest based on the delayed payment of the VAT liability.

A standard penalty may be payable depending upon the reason for the late submission.

The difference between a small and a large error are:

A small error is defined by being less than the de-minimus limit.

The de-minimus limit is the greater of:

£10,000 and
1% of turnover (subject to an upper limit of £50,000)

Consequences Small Error Large Error
Default interest payable? No Yes
How to disclose? On the next VAT return Separately disclose to HMRC
Standard penalty? May be payable depending in reason of error May be payable depending on reason of error

Illustration:

Bebe Ltd. has made an error relating to understated output VAT of £7,000 for the quarter to 31/12/2023.

The company’s turnover for the quarter is £200,000.

How should this error be disclosed to HMRC?

  • Solution:

    De-minimus limit: 

    The greater of:
    1) £10,000
    2) 1% * £200,000 = £2,000

    The error is small because it is less than the de-minimus limit. 

    Therefore, it can be disclosed on the next VAT return. 

    No interest will be payable and depending on the reason for the understatement, a standard penalty will be decided.

Disclosed by HMRC

- Default interest due regardless of size of error.
- Standard penalty.

  • Standard penalty is based on the reason of inaccuracy

    Genuine mistake – no penalty

    Careless mistake – 30% of VAT due

    Deliberate mistake – 70% of VAT due

    Concealment – 100% of VAT due

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