VAT penalties & how to avoid them

This guide provides VAT penalties advice and examples of the different types of situations that may incur a penalty such as:

• Late registration for vat
• Making errors on VAT returns
• Failure to notify penalty

By understanding how HM Revenue and Customs (HMRC) penalties work we hope to give you some guidance as to how to avoid VAT penalties

Below are examples of different types of situations that may incur a VAT penalty:

VAT Late registration penalty

Failure to register for VAT on time means you can be liable to a penalty. The vat penalties for late registration will be the greater sum of:

• £50 or
• between 5% and 15% of the VAT due depending on the lateness of the notification.

Making errors on VAT returns

Making errors on VAT returns and claims can incur penalties. You could be fined for:

• not taking ‘reasonable care’ or
• deliberately including false information.

Mistakes can be easy to make, check with one of our accountants in Hull to ensure errors are not made.

What to do if you have made an error on your VAT return?

When you find you have made an error(s) in a previous VAT return you must tell HMRC. It would also be a good idea to include the net value of the adjustment in the VAT return for the period of discovery if:

• the net value of the errors does not exceed the greater of £10,000 or
• 1% of the box 6 figure up to £50,000.

In all circumstances you can use this form (VAT652 Voluntary Disclosure of VAT Return Errors) to notify HMRC.

Retention of records

All records must be kept for a period of 6 years. If HMRC need to look back and you do not have these records then there is a VAT penalty for breaching this requirement.

Late VAT return or payment

If HMRC has not received your return and all the VAT due by the due date a business will enter the penalty regime.

In the first instance a Surcharge Liability Notice (SLN) will be issued which acts as a warning letter. If you are late with future returns or payments then you will receive a Default Surcharge penalty. The penalty fee will be the greater sum of:

• £30 or
• Between 2%-15% of the VAT on the late VAT return

Failure to notify VAT penalty

Failure to notify HMRC of any changes to your business that may have an effect on VAT may result in a penalty. If you are unsure if recent changes will affect your VAT then seek advice from an accountant in Hull.  

How is a VAT penalty calculated?

HMRC will assess the amount of lost VAT revenue and will apply the penalty as a percentage of VAT revenue lost up to a maximum of 100%. So, if HMRC have lost £50,000 in lost revenue, they can make you pay £100,000 back.

The VAT penalty is dependent on:

• Whether a business's actions were deliberate.
• Whether the business contacted HMRC, or if they had to contact you.
• How detailed your record keeping was.

In summary if you deliberately try to hide VAT, do not notify HMRC and keep poor VAT records then you will likely be penalised more than if you made a mistake, told HMRC and presented them with correct and proper records.

Peace of mind and quality VAT penalties advice

By getting our specialist tax investigation expert involved as early as possible in VAT investigations, substantial reductions can be made to the amount of tax due and the imposed penalties such as:

• VAT late registration penalty

Taking action urgently is essential if you have received a VAT Assessment, particularly if you feel it might be excessive. Our accountants in Hull are experienced in dealing with HMRC enquiries and tax investigations and regularly negotiate and defend the application of penalties on behalf of our clients. If you have substantial VAT penalties and you cannot pay the tax then please get in touch.