Challenging penalties for late VAT returns

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Andrew Needham explains how submitting a VAT return late incurs a penalty but that a business can avoid it if it has a reasonable excuse.

If a business is late with its VAT return and/or payment, it will fall into the surcharge liability regime (contained in VATA 1994, s 59). The first late return results in the issue of a surcharge liability notice (SLN). 

If there is a subsequent late return within 12 months, the following penalties apply:

  • 2% of the unpaid tax (minimum £30);
  • for a second default in the next 12 months - 5% (minimum £30);
  • from then on - by 5% a time, to a maximum of 15% (minimum £30).

If a business’s turnover is less than £150,000 per annum, the second late return only generates a ‘help’ letter before the penalties apply. If a surcharge at the 2% or 5% rate is under £400, HMRC do not assess it, but a further SLN is issued and the 12-month period is extended, and the percentage rate still goes up.

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Reasonable excuse

A business has a defence for missing the time limit if the return or tax was dispatched ‘at such a time and in such a manner that it was reasonable to expect’ that HMRC would get it on time; or it has a reasonable excuse for submitting the return late. But what counts as a ‘reasonable excuse’?  Lack of money is specifically excluded from being a reasonable excuse, while late delivery by someone who prepares the VAT return for a business is unlikely to be a reasonable excuse either. Typical reasonable excuses are such things as sickness, departure of key staff, or computer faults, but only until the business could have been expected to cope by taking action to recruit staff, obtain backup, and so on.

Reasonable excuse for having no money

In the case Steptoe (LON/89/745 No 4283: [1991]), the Court of Appeal held that a taxpayer’s late VAT payment could be excused because the single customer, on whom he was reliant for 95% of his business, consistently paid its bills late. That case established the need to look beyond the immediate cause of the late payment to the underlying cause. The tribunal decision in CH Clifton & Sons Ltd (LON/92/156 No 9593) showed that the same principle can work for the taxpayer where an important element of the underlying cause is late payment by a number of customers.

Let HMRC know if the return is going to be late

If a business knows that it is going to have problems paying its VAT liability at the end of the quarter, there are still things it can do to avoid a penalty. The first point is to submit the return on time even if it can’t pay its liability. If it can pay some of the liability, it should pay as much as it can.

The next thing to do is to contact the business payment support service (BPSS) run by HMRC (tel: 0300 200 3835) before the due date for payments and agree a payment schedule for the outstanding amount. They are not usually that generous, normally three to six months, but what it does do is remove the surcharge penalty and no further SLN will be issued so the surcharge period will not be extended for a further 12 months. If the business leaves it until after the due date for payment, it will still get a penalty, so it is important to act early.

Practical tip

If a business is late sending in returns and payments, it will find itself in the penalty regime. If it has a reasonable excuse for the lateness or agrees a payment schedule with HMRC before the return is due, it may avoid a penalty.