ACCA TX UK Syllabus F. Value Added Tax - Penalties and interest for late filing and late payment - Notes 9 / 11
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 7.75% 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 |
---|---|---|
30/6/24 | 22,000 | 7 |
30/9/24 | 29,500 | 45 |
31/12/24 | 24,000 | 21 |
31/3/25 | 31,000 | 2 |
For the quarter ended 30/6/24
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 7.75% x 7/365 = 33
For the quarter ended 30/9/24
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 7.75% x 45/365 = 282
For the quarter ended 31/12/24
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 7.75% x 21/365 = 107
For the quarter ended 31/3/25
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 7.75% x 2/365 = 13
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 31/12/2024.
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 = £2,000The 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