VAT Penalty Points: VAT Late Payment Penalty Implications for Businesses
Missing a VAT deadline leads to penalties from HMRC, creating financial strain for businesses. Failure to submit returns on time results in VAT penalty points, which escalate into fines if businesses do not act quickly.
Many companies struggle with this system due to financial difficulties. HMRC uses the penalty points system to encourage timely compliance while offering some flexibility for occasional late submissions.
Read on to find out more about VAT penalty points, how much interest can accrue, likely underlying reasons behind late payments and options for businesses struggling to settle their accounts on time.
What are VAT penalty points?
HMRC has applied – since 1 January 2023 – the penalty points system when businesses fail to submit their VAT returns by the deadline, replacing the old VAT default surcharge process. Each missed submission results in a penalty point.
Once a business reaches a set penalty point threshold, HMRC issues a £200 fine. Additional £200 fines continue for every missed submission until the business brings its VAT account up to date.
The penalty threshold depends on the accounting period. Companies submitting VAT returns monthly reach the threshold after five points, quarterly filers reach it at four points, and annual filers hit it after two points:
- Annual accounting period: 2 penalty point threshold
- Quarterly accounting period: 4 penalty point threshold
- Monthly accounting period: 5 penalty points threshold
If a payment is 1 to 15 days late, there is no late payment penalty fine yet, but interest accrues.
Late payment interest implications
HMRC also imposes late payment interest when businesses fail to pay VAT by the deadline, increasing costs over time. These penalties make it harder for businesses to recover financially.
Interest on overdue payments begins accruing from the initial day the payment is late and continues until the business settles the full amount. The interest rate is 2.5% on top of the current Bank of England base rate.
- As an example, at the current time of writing, the Bank of England base rate is 4.5%, so the late payment interest would be 7% (if missing a recent deadline for the relevant accounting period)
Businesses struggling to pay should attempt to settle as much as possible as soon as possible. If full repayment is not possible, they should explore alternative solutions to prevent further penalties.
One caveat is that if you take over another VAT-registered business as a ‘going concern,’ any penalty points that business accumulated do not carry over to your VAT registration number. This applies even if the VAT registration number transfers over from the previous owner too.
Potential underlying reasons for late payments
Many factors causing late VAT payments often have links to financial instability.
Cash flow problems frequently arise when businesses use VAT funds for other expenses instead of setting them aside – learn more here: When is a Company Insolvent? Three Ways to Check
Delays also occur when businesses wait for customer payments, particularly in industries with long invoice cycles. For more details, we recommend reading this guide: What Is A Charging Order?
External factors, such as economic downturns or unexpected costs, can make on-time VAT payments harder to manage.
Options after missing payment deadlines
Businesses that miss VAT payment deadlines must act quickly to avoid additional penalties. If immediate payment is not possible, a Time to Pay arrangement (TTP) with HMRC may be an option.
TTP agreements allow businesses to spread VAT payments over an agreed period, usually lasting up to one year. While this arrangement provides relief, businesses must keep up with ongoing VAT payments to remain compliant.
If a TTP is not suitable, consider other options. For example, a Company Voluntary Arrangement (CVA):
- Allows businesses to restructure their debts while continuing to trade
- Is a formal agreement between a company and its creditors, including HMRC, that can make repayment more manageable
However, if such a recovery is not possible, a creditors’ voluntary liquidation (CVL) often presents a better option than a compulsory, forced liquidation. In a CVL, the insolvency practitioner converts the business’ assets into cash to repay creditors as much as possible.
For any company owing money to the government, we recommend reading our HMRC debt management and collection guide. For other business advice, take a look through our blog.
Recent articles include guides on what happens when an active proposal to strike off is suspended and when creditors have proof of debt. Also, find out – what does IBR mean?
Here at Hudson Weir, our team of highly qualified insolvency practitioners and chartered accountants has extensive hands-on business experience. We understand the pressures companies face in such situations and can help find a resolution or rescue option.
For further information on the implications of VAT penalty points, or assistance with clearing business debts, please contact us.
