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Overhaul of penalty regime for late VAT returns

Currently there is a separate penalty regime for the late filing of VAT returns, this is known as the Default Surcharge Regime.  Following consultation, this system of penalties will be replaced by separate penalties for late filing and/or late payment.

Baker Tilly analysis


The proposed regime now differentiates between a taxpayer that files and pays one or two days late and a taxpayer that has not filed and paid after 6 months. This aspect is to be welcomed as one of the main criticisms of the current regime is that the default surcharge is not time-geared.

Although the late filing and late payment penalties appear to be lower than the current Default Surcharge percentages, the possibility remains for a taxpayer to be hit with a large penalty, particularly where a VAT return is not filed and paid after 6 months from the due date.

Finance Bill 2010 will contain the relevant legislation but the regime will be brought into effect by Treasury Orders at a date to be announced.  HMRC say the implementation will be staged over a number of years.

In detail


Late filing and payment of VAT is currently treated under the Default Surcharge Regime. The first default does not carry a penalty but thereafter any subsequent defaults that occur within the period covered by the Notice are subject to increasing penalties of 2%, 5%, 10% and then 15% of the tax due. The Regime does not reflect how late the payment is, such that payment that is received by HMRC one day late will be charged at the same penalty rate as if it were 2 months late.

The new Regime consists of two penalties: one for late filing of the return, the other for late payment.

Late Filing

If a quarterly VAT return is not filed on time, a penalty of £100 will be levied. In addition, a penalty period begins for the duration of 12 months. 

The second default (i.e. the first in the penalty period) will be charged at £200, the third at £300 and the fourth and subsequent at £400 each.

Furthermore, if a VAT return remains unsubmitted after 6 months, a penalty of the greater of 5% of any VAT liability that would have been shown in the return in question and £300 will be levied. If the failure to pay continues after 12 months, the penalty is the same unless the withholding of the information is deliberate and concealed (penalty will be the greater of 100% of any VAT liability and £300) or deliberate (greater of 70% and £300).

Late payment

There is no penalty for the first failure to pay the VAT due on time.  However, a penalty period commences which lasts 12 months.  Subsequent failures within the penalty period are subject to a penalty; namely 2% of the tax due for the first default within the period, 3% for the second default and 4% for the third and subsequent defaults for those taxpayers on quarterly returns.

If any amount of tax is still unpaid after 6 months from the penalty date, a penalty of 5% of the VAT due is levied. The penalty remains at 5% if the VAT is still outstanding after 12 months.