VAT Penalties Blog

27.03.2017

How to manage VAT default surcharges

The Default Surcharge is often seen as a blunt instrument in the battle to improve taxpayer compliance. However a helpful decision on managing Default Surcharges was released earlier this month. The case was heard by the Upper Tribunal so it sets a precedent which HMRC have to follow.

A Default Surcharge is the term given to the penalty levied for not sending your VAT return in on time or indeed the payment on time.  The way the Default Surcharge works is that the first time the return or payment is late HMRC will issue a Default Surcharge Liability Notice (SLN). This puts you on notice that you are in the regime for the next 12 months and going forward each incidence of a late return or payment will result in an increasing level of penalty. The first time you are late after the SLN the penalty is 2% of the VAT due on that return, it then goes up to 5% for the next default, 10% for the third and finally 15% for the forth late return or payment, staying at that level for each default until all returns and payments have been on time for 12 months.

As the Default Surcharge is calculated as a percentage of the VAT due the penalty can be very high even if you are only a couple of days late. And as a late repayment return can trigger a default it is very important to make sure both returns and payments are always made on time. However, if you are unfortunate to be in the regime, this case may be helpful in avoiding further defaults.

In this case the taxpayer already had a VAT debt with HMRC for previous returns and if it was late again it would incur a 15% Default Surcharge amounting to over £290,000 on its next return. Therefore to avoid this the taxpayer indicated on the compliment slip sent in with the cheque that the money was to be allocated to the current return rather than the historic debt. This was in line with common law principles on the payment of debts, but HMRC challenged the allocation on the basis that as the latest VAT return wasn’t due when the return and cheque were sent in this wasn’t a debt.

However, the Upper Tribunal disagreed on the basis that the VAT debt was created as soon as the taxable supply was made holding that HMRC must follow the taxpayers instructions as to the allocation of payments provided these are given before money changes hands.  The earlier debts remained on file but allocating the money to the most recent period enabled the taxpayer to avoid another Default Surcharge.

If you would like to discuss the issues raised in this article or how we can help you manage your VAT affairs, please contact:

Ellen Main-Jeffrey

Head of VAT Services

01926 468707

VAT-Penalties Team

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