What happens if you don’t pay VAT on time?

Staying on top of tax regulations and guidelines is crucial for anyone running their own business. But what happens if you forget about your tax bill, or you pay it after the deadline? This article will look at the following areas:

• What is VAT? 
• How often do I have to pay VAT?
• What happens if you don’t pay VAT on time?

VAT is short for Value Added Tax. This is a charge added to the price of many goods and services for consumers. The tax is set at 20% in the UK (with some items being sold for a reduced rate of 5%), but consumers in the UK do not pay VAT on food, children’s clothing, books, magazines or charity shop items. 

Businesses with a turnover of £85,000 or more are legally required to register for VAT.

If your business meets the £85,000 threshold, or you have voluntarily registered for VAT, then you must submit VAT returns every three months, via the HMRC website portal. Filing paper returns without permission to do so comes with a £400 fine. VAT returns must be filed and your subsequent VAT bill paid within one calendar month and seven days after the end of each three month accounting period. You can find your deadline date on your HMRC VAT online account.

If HMRC doesn’t receive your return by the deadline, or if you don’t make the full payment of your VAT bill by the date required, then you will be issued with a ‘default’ on your HMRC account. For your first default then you will not be issued with a penalty fine. Afterwards, you may enter what is called the ‘surcharge period’.

The surcharge period lasts for one year, and if you fail to pay in full on time again and receive a second default you’ll be hit with fees. The fee will be a percentage charge of the outstanding amount you owe HMRC. This percentage charge will get larger over time with every default that you incur, and if you keep missing deadlines then your surcharge period will be extended and you’ll continue to mount up the extra charges on top of your owed VAT.

HMRC allows a certain amount of grace if this is your first late payment for your VAT. In the twelve-month period following, you may not accrue any surcharges at all. HMRC will instead send you a reminder letter advising you that the VAT you owe is late and that you’ll need to bring your account up to date, and if you do not make full payment after the warning then HMRC will take further steps to obtain payment.

If your turnover is over £150,000 then you are only provided one ‘forgiveness’ period for any late VAT bills, without surcharges. Smaller companies with less turnover are offered support to pay, and if they incur a second default they are issued with a Surcharge Liability Notice.

Upon the second default for a company with less than £150,000 turnover, you will then be placed in the surcharge period for twelve months. If you miss another deadline in that twelve months, then your surcharge period will be extended by another year when you will continue to accrue charges on every VAT payment. 

When the charges build up over the twelve-month period, or longer if you miss more deadlines, then the payments can start to get hard to control. 

Your VAT bill will continue to rise and rise because of the extra percentage charges on top of the bill you owe, and this can be very difficult to manage.

A lack of available money for your VAT bill suggests you might have cash flow issues. You’re collecting VAT from your customers and that money should be put aside for you to then pay back to HMRC. And if you don’t have that VAT money you charged available then you’re likely spending more than you’re making, which could be disastrous if you let it go on for too long.

To prevent late payments, set aside your VAT money monthly so you know how much you’ll owe. Ring fencing the money like this will avoid you spending it throughout the month.

Be sure to try our Online VAT Calculator to help you break down the Value added tax on individual transactions.

If you find yourself issued with defaults on your VAT returns and payments and are unable to pay the cost upfront, you have options.

First, speak to HMRC and see if you can establish a Time to Pay arrangement (TTP). This arrangement would let the business pay its owed taxes in monthly instalments instead of a bulk sum at the end of the three month accounting period. 

A TTP arrangement can last up to a year, and you still have to pay the ongoing taxes throughout the year, but you’ll pay the late money back more slowly, to give your cash flow time to recover from any temporary setbacks. If your arrears on your VAT is a symptom of larger financial issues then you may struggle to maintain payments on a TTP, and HMRC can advise on how to move forward.

By setting up a Countingup business current account, you can manage all your financial data in one place. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. You can view real-time insights into your business’ finances, such as cash flow and profit and loss statements. It also allows you to calculate tax estimates so that you can keep on top of your VAT bills and expenses effectively. 

Download the Countingup app to apply for your business current account in minutes. All you need is proof of ID and a selfie. Download the app here.