Businesses which fail to submit VAT returns on time, or pay their VAT late, enter the VAT surcharge system. For small businesses with turnover of less than £150,000 this only applies if there is more than one failure in a 12-month period. For the first offence the small business should receive a help letter from HMRC.
HMRC should tell the business that it is within a surcharge period by issuing a surcharge liability notice (SLN). If the business repeatedly files VAT returns late or pays VAT late, the SLNs will carry on arriving and penalties will mount up. These start at 2% of the late paid VAT (minimum of £400), and increase each time a SLN is issued until the penalty is 15% of the late paid VAT.
The key to this process is the receipt of an SLN. If the business does not receive an SLN, any default surcharge (penalty) issued on the back of that SLN is invalid. Three recent FTT cases (see links below) have established that HMRC does not keep an accurate list of the address each SLN was sent to and when it was issued, or if it does, it cannot produce that evidence in court.
If our client receives a VAT default surcharge out of the blue, and we weren’t aware of an SLN being received, we need to appeal against that penalty. We can also ask for a review by an independent team within HMRC (VAT Notice 700/50, section 7). We have to make it clear that the SLN was not received and ask HMRC to produce evidence to prove it was sent.
Written by the Tax Advice Network