TXF6 UK
Syllabus F. Value Added Tax F2. Computation of VAT liabilities

F2i. Default surcharge and penalty for incorrect VAT return

Syllabus F2i)

Understand when the default surcharge, a penalty for an incorrect VAT return, and default interest will be applied.

The default surcharge

If a taxable person:
- submits a VAT return late, or 
- submits a return on time but makes late payment of the VAT due then:

  • HMRC will issue a surcharge liability notice which will specify the surcharge period (normally 12 months).

  • If within these 12 months, you don't make another default:

    You will NOT pay any surcharge.

  • If within these 12 months, you make another default:

    1) You will have to pay a surcharge which is calculated as a % of the tax paid late and 

    2) The surcharge notice period will be extended for another 12 months.

Default involving late payment of VAT in the surcharge period  Surcharge as a % of the VAT outstanding at due date
1st default 2%
2nd default 5%
3rd default 10%
4th default 15%

For the first and second default, if the surcharge due is less than £400, then nothing is payable.

For the third and fourth default, there is a minimum of £30 payable, even if the surcharge does not amount to this month.

Illustration:

Tommy has submitted his VAT returns as follows:

Quarter ended Vat paid (£) Date submitted
31/03/18     1,200 15/05/2018
30/06/18 1,000 07/08/2018
30/09/18 3,100   05/12/2018
31/12/18 1,300 02/03/2019

VAT returns late?

What are the consequences of Tommy submitting his VAT returns late?

Solution:

  • 31/03/2018
    Submitted late. 

    Surcharge period notice issued of 12 months, ending on 31/03/19.

    No default surcharge levied on initial late submission.

  • 30/06/2018
    Submitted and paid on time.

    Still within the surcharge period, ending on 31/03/2019.

  • 30/09/2018
    Submitted late. 

    This is the first default within the surcharge period, therefore a default surcharge of £3,100 * 2% = £62 is levied. 

    This is not payable by Tommy because it is less than £400. 

    However, the surcharge notice period will now extend to 30/09/2019.

  • 31/12/2018
    Submitted late. 

    The surcharge of £1,300 * 5% = £65 is again less than £400, therefore this will not be payable by Tommy. 

    However, the surcharge notice period will now extend to 31/12/2019.

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 31/12/2018.

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