Paying VAT on time

When most taxes are paid late by 30 days or more there is a statutory penalty of 5% of the unpaid amount, which increases to 10% for a delay of 6 months, and to 15% for a delay of 12 months or more. Interest on the late paid amount may also be charged.

The penalty is calculatedly separately for each tax liability, so if the taxpayer regularly pays his self-assessed income tax late by a few days no penalty is due. This is not how it works for late paid PAYE or VAT. For those taxes the penalty builds up according the number of late payments within the tax year (PAYE) or surcharge period (VAT), and every day late is counted as a default.

For late paid VAT it is not easy to spot that a 12-month surcharge period has started, as its triggered, and extended, by each late payment or late return filed. The taxpayer should be notified by letter, but no penalty will be payable for up to four defaults, if the amount due is less than £400.

When the business pays VAT late on the fifth occasion, even by one day, the penalty will be 10% of the amount due, or 15% where the annual turnover of the business is £150,000 or more. This can come as a nasty surprise to the business especially where the late payment was due to a failure of the banking system.

The Tribunal judge may be sympathetic if the failure of the bank to transfer funds was unforeseen, as in case of Stylographics Ltd. However, key staff not having access to the internet to operate online banking while on holiday was not regarded as a reasonable excuse for Galaxy Decorators Ltd.

Reciprocal Ltd claimed it had agreed a time to pay (TTP) arrangement with HMRC, but neither the company or HMRC could produce any documentary evidence of the detail of this TTP agreement. So when VAT payments were not correctly allocated by HMRC, or repaid as the taxpayer expected, it was apparently the taxpayer’s fault for not spotting the missed payments. The penalty was upheld.

 

Written by the Tax Advice Network