If you cannot pay your HMRC VAT tax return debt on time then you can anticipate HMRC will at some point starting pressing you for payment and if necessary raise an Assessment.

What Is A VAT Assessment?

If you do not send your VAT Return and pay any VAT due on time, you will get a ‘VAT notice of assessment of tax’ from HMRC, telling you how much VAT they think you owe.

What you need to do

Send your VAT Return and any payment due immediately.

If the assessed amount of VAT is too low you must tell HMRC within 30 days. Do this by sending a correct VAT Return and VAT payment or contacting them. You may be charged a penalty if you do not.

If the assessment is too high, you cannot appeal it. You must send a correct VAT Return and VAT payment.

Surcharges And Penalties

HMRC record a ‘default’ if:

  • they do not receive your VAT return by the deadline
  • full payment for the VAT due on your return has not reached their account by the deadline

Surcharges

You may enter a 12 month ‘surcharge period’ if you default. If you default again during this time:

  • the surcharge period is extended for a further 12 months
  • you may have to pay an extra amount (a ‘surcharge’) on top of the VAT you owe

If you submit a late return, you will not have to pay a surcharge if you:

  • pay your VAT in full by the deadline
  • have no tax to pay
  • are due a VAT repayment

HMRC will write to you explaining any surcharges you owe and what happens if you default again.

How much you pay

Your surcharge is a percentage of the VAT outstanding on the due date for the accounting period that is in default. The surcharge rate increases every time you default again in a surcharge period.

This table shows how much you’ll be charged if you default within a surcharge period. You do not pay a surcharge for your first default.

Defaults within 12 months     Surcharge if annual turnover < £150,000             Surcharge if t/o is £150,000+

2nd                                                 No surcharge                                                                              2% (none if < £400)

3rd                                                  2% (no surcharge if this is less than £400)                            5% (none if < £400)

4th                                                  5% (no surcharge if this is less than £400)                            10% (or £30 if less)

5th                                                  10% or £30 (whichever is more)                                              15% (or £30 if less)

6 or more                                       15% or £30 (whichever is more)                                             15% (or £30 if less)

Table Code: t/o is annual turnover

Penalties

HMRC can charge you a penalty of up to:

100% of any tax under-stated or over-claimed if you send a return that contains a careless or deliberate inaccuracy

30% of an assessment if HMRC sends you one that’s too low and you do not tell them it’s wrong within 30 days

£400 if you submit a paper VAT return, unless HMRC has told you you’re exempt from submitting your return using your VAT online account or Making Tax Digital compatible software.

Interest On Underpaid Or Overpaid VAT

HRMC may charge you interest if you do not report and pay the right amount of VAT. If you pay too much VAT because HMRC make a mistake, you can claim interest.

When is interest charged?

Interest may be charged if you:

  • report less VAT than you charge, or reclaim more than you pay
  • pay an assessment that HMRC later find was too low
  • let HMRC know you owe them VAT because of a mistake on your VAT Return

How much interest is charged?

You’ll be charged 2.6% interest.

You can use your VAT online account to check the amount you owe.

HMRC will also send you a notice telling you how much you owe and how it’s worked out.

If you do not pay within 30 days, further interest is charged on the VAT due from the date of the notice. You’ll be charged interest for as long as you do not pay, up to a maximum of 2 years.

You cannot deduct the interest HMRC charges you when working out your taxable profits.

Claiming interest

You may be able to claim interest if HMRC’s mistake means:

  • you pay too much VAT
  • you reclaim too little VAT
  • a payment to you from HMRC was delayed

Normally HMRC will not repay interest if you’ve paid too much VAT because of a mistake you made.

How much interest can you claim?

You can claim 0.5% interest. This is normally paid for the whole period from when the VAT was overpaid or reclaimed until the date repayment is authorised.

There’s a different interest rate for tax that was overpaid before 29 September 2009.

If you caused a delay to any payments (for example by not claiming straight away) HMRC might leave this time out.

You have to claim the interest separately from the repayment itself.

Write to HMRC with details of the repayment, explaining why you’re owed interest. You must do this within 4 years of the repayment’s authorisation date.

Any interest you get from HMRC counts as taxable income.

Paying interest to your customers

You must pay any of the interest you get (as well as the VAT) to your customers if HMRC’s mistake means they paid too much VAT.

Contact the person at HMRC who dealt with your claim if you need to find out how the interest was calculated. This can help you work out how much you need to repay each customer. You must give the money back to HMRC within 14 days if you cannot get in touch with a customer to repay them.

Interest rates

HMRC only charge or pay simple interest (interest on the original amount, not interest on interest).

Challenging an HMRC decision

You cannot appeal the decision to charge you interest but you can challenge the actual amount.

How To Challenge The Actual Amount Of VAT HMRC Charged

HMRC will send you a decision letter that will tell you if you can appeal against a tax decision.

You can appeal against some decisions about:

  • your VAT tax bill
  • a request for information or to check your business records
  • a penalty (for example if you paid your VAT late or filed your VAT tax return late)

Your appeal can be made by someone who deals with your taxes, for example an accountant.

You’ll usually have to pay your own costs if you appeal a tax decision. You may be able to delay the payment of a penalty or any tax you owe until your appeal’s been resolved.

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