A Guide to VAT Surcharge Rates

A VAT surcharge is a penalty imposed when you do not pay all the VAT due by the prescribed deadline. Specifically, the surcharge is a percentage of the outstanding VAT. In many cases, the surcharge rate continues to increase if you do not settle your outstanding VAT. That is, you have to pay a higher percentage of outstanding VAT for each deadline missed within the surcharge period. 

VAT surcharges are, therefore, a strong incentive to meet your VAT obligations as promptly as possible. Unlike a fixed fine, the surcharge rate increase means you have to pay more as time passes.

How do VAT surcharges work?

To illustrate how VAT surcharges function in practice, let’s consider a real-world example.  

Assume you run a business in the UK with an annual turnover exceeding £150,000. You default on your owed VAT for the first time. In that case, the UK tax authority, HMRC, imposes no surcharge.

If you default a second time within a 12 month period, HMRC applies a 2% penalty (assuming the outstanding VAT is over £400). On the third default within that period, the penalty is 5%. If you default a fourth time, there’s a 10% default. Default five or more times, and you will be subject to a default surcharge of 15% of the value of the outstanding VAT. 

Note that the surcharge rates are somewhat different for VAT registered businesses with a turnover below £150,000.

Is a VAT surcharge a penalty?

A VAT surcharge is a penalty imposed by tax authorities for non-payment of VAT. However, it is a penalty that has particular characteristics. Consider, by contrast, a fixed penalty for an infraction. For instance, HMRC has set a fine of £400 for submitting a paper VAT return, rather than a digital return in line with the requirements of making tax digital. 

A VAT surcharge is different. As the surcharge is a percentage of the VAT owed, the specific amount owed is not predefined. Rather,  the value of a VAT surcharge is defined by two things: the surcharge rate and the amount of VAT owed. 

The cost of delayed VAT payment

Note that a VAT registered business may also incur further VAT obligations during the surcharge period.

After all, a VAT registered business is obliged to collect VAT on all applicable supplies of goods and services. So if a business continues to operate while it owes VAT, and continues to default, the total amount of outstanding VAT and the surcharge rate on that amount could increase.

That could translate into a very significant ultimate penalty. For some businesses, particularly small and medium-sized businesses, the obligation might even be ruinous. 

Given the consequences of chronic non-compliance, businesses should prioritize effective ongoing VAT management. 

See related: Does a Limited Company Need to Be VAstuT Registered?

The new HMRC penalty system

VAT registered businesses in the UK should note that HMRC is revising its penalty systems for late payment. 

According to UK tax authorities, the new system will be fairer and more predictable. Under the new system, there are two VAT penalties. 

The first penalty applies if the taxpayer fails to pay VAT due within 15 days of the due date. The penalty is set at 2% of outstanding VAT. If the taxpayer does not pay the owed amount after day 30, the penalty increases to 4% of VAT outstanding.

If VAT remains unpaid on day 31, then HMRC applies the second penalty. The second, additional penalty, accrues at a daily rate of 4%.

The new penalty system was originally scheduled for April 2022. However, HMRC has delayed rollout until 2023.

Can I appeal a VAT surcharge?

Tax officials are generally committed to providing a fair and consistent service. For example, if you have a ‘reasonable excuse’ for missing your VAT payment in the UK, then HMRC undertakes not to apply a VAT surcharge. 

However, there is no precise legal definition of a reasonable excuse, and interpretations may differ. If you believe you have valid reasons for not paying on time, but are uncertain how to proceed, consider consulting a VAT specialist for guidance. 

Appealing a VAT surcharge

If you do not believe a surcharge or other VAT penalty is legitimate, you can appeal the decision. The process is different in each country.

In the UK, you can write to HMRC requesting a review of the decision. Your accountant or VAT specialist can write to HMRC on your behalf, as long as you authorize the correspondence. In either case, the appeal must be made within 30 days.

You can appeal on the basis that the default surcharge should be removed entirely or specify that the wrong surcharge has been applied or that authorities have miscalculated the amount of outstanding VAT.

If you disagree with the outcome of the review, you can appeal to an independent tribunal. 

Additional penalties for late VAT returns

In addition to VAT surcharges, tax authorities are empowered to charge additional, sometimes severe, penalties for noncompliance. For example, if VAT returns are misleading or erroneous, HMRC warns they may charge 100% of any understated VAT or excess VAT claimed.

It’s important to note that this severe penalty applies both to failing to pay the VAT you owe and for attempting to recover VAT to which you are not entitled. 

It’s no wonder that many businesses are hesitant about reclaiming VAT. VAT recovery is complex and administratively demanding. When relying on manual processes, the risks of errors are high.

Indeed, a study reveals the following eye-opening statistics:

• 27% of VAT claimed is based on non-compliant or missing invoices
• 16% of invoices claimed are not scanned or filed
• 11% of the claimed invoices are in a non-compliant format

Even worse, most employees don’t even know how a compliant invoice should be structured.

Fortunately, the quandary can be easily overcome by deploying advanced VAT software and outsourcing domestic VAT recovery to specialists.  

A fully integrated VAT solution enables you to remain fully VAT compliant while maximizing VAT recovery. Critically, it ensures you avoid VAT surcharges and other penalties.  

How do I avoid VAT surcharges?

Avoiding VAT surcharges is simple enough in principle. Ensure you pay all outstanding VAT on time and always submit complete and accurate VAT returns in every country in which you are registered for VAT.  

In practice, that can be an enormously complex undertaking, especially if you operate in multiple jurisdictions. From VAT as a sole trader to a company, mistakes and oversights are all but inevitable without specialized VAT technology and expert guidance. Even in cases where you are fully VAT compliant, you may miss out on opportunities to fully recover VAT. 

VAT IT’s integrated VAT solution considers your whole business, ensuring 100% VAT compliance wherever you operate. At the same time, our technology and unmatched expertise ensure you maximize VAT recovery, effectively reducing the cost of doing business. 

Get in touch with VAT IT to ensure you never face the risk of penalties, surcharges, or legal jeopardy for VAT non-compliance.