All businesses in the UK, with annual turnover above the VAT threshold (currently £85k), are required to register for VAT and charge 20% VAT on their sales. This VAT must then be paid over to HMRC each quarter. This is not additional tax payable by the business - they are simply becoming a tax collector for HMRC. 
 
Some businesses, however, can get into trouble paying their VAT bills. Cash flow issues can mean that companies can’t pay their VAT bills on time, leading to financial penalties. 

When do you need to pay VAT bills? 

Ideally, you’ll treat VAT as something entirely separate from the rest of the finances of your company - it is not the business' money! The money you receive in the form of VAT is essentially a sales tax paid by customers for the privilege of consuming your products and services. It’s not something that you pay directly, by instead administer on behalf of the tax authorities. 
 
HMRC demands that businesses pay their VAT bills within one month and seven days of the end of their VAT period (usually quarterly). 
 
The good news is that if you’ve registered for VAT with HMRC, they will send you emails or update you on your business tax account when you have a VAT return to submit and pay. HMRC will often send reminders by post too, especially if you haven’t filed before. 
 
Unsurprisingly, HMRC punishes companies who don't pay their VAT bills on time with a range of financial penalties. 

Penalties for late registration 

Tax rules, at present, state that a business must register with HMRC for VAT if turnover exceeds £85,000 per year within 30 days of this happening. HMRC will issue a penalty if you fail to register for VAT when you should have done - so it is important to keep an eye on your turnover! 
 
The penalty operates as a percentage value of your business, and you can only avoid it if you have a good reason for the delay. 
It’s worth noting that the so-called twelve-month period relates to any preceding rolling twelve-month period, not just a particular tax year, say from April to March. If you notice that your income dips above the £85,000 limit for any preceding twelve-month period, you have to register for the tax. If you don’t, HMRC will issue a penalty and force you to pay it. 

Penalties for late VAT returns or payments 

If you are late submitting your VAT return or making payment, HMRC will put you into the surcharge system and penalties will apply. These penalties depend on your business size. 
 
The good news is that if you run a small business, the penalties for failing to pay VAT on time are less than if you run a large company. HMRC classifies you as a small business if your turnover is less than £150,000 per year. 
The penalties take the following form: 
Default 
If small company 
If large company 
First 
No surcharge and a letter guiding you through the process 
No surcharge and entry into the surcharge system 
Second 
No surcharge and entry into the surcharge system 
2% surcharge on the VAT outstanding 
Third 
2% surcharge on the VAT outstanding 
5% surcharge on the VAT outstanding 
Fourth 
5% surcharge on the VAT outstanding 
10% surcharge on the VAT outstanding 
Fifth 
10% surcharge on the VAT outstanding 
15% surcharge on the VAT outstanding 
Sixth 
15% surcharge on the VAT outstanding 
20% surcharge on the VAT outstanding 
 

You can appeal a VAT surcharge 

Default surcharges usually last for twelve months from the submission of your payment. If you continue to make late payments, HMRC will extend the surcharge period longer than the twelve months. 
 
Some businesses try to appeal the surcharge. Usually, they do this on several grounds. Frequent reasons for late payments include loss of financial documents in fire or flood, lack of funds because of suppliers failing to pay on time, and severe illness around the payment date of taxes. 

How to pay 

All VAT payments must be made electronically. You can pay in a variety of methods. 
 
The most common way to pay is via direct debit. This system takes VAT payments from your bank account on set days in the month, ensuring that you regularly make payments as you do business. 
 
All other payment methods must pay VAT one month and seven days after the end of the VAT accounting period. Usually, this means that you need to make VAT payments by the 5th of every month to ensure that HMRC gets paid by the 7th. 

Next steps 

We are VAT experts and can help you with all aspects of this well-known (but not so much loved!) subject. Whether you’re wondering whether you should register for voluntary VAT, or if you’re about to hit that all-important threshold, we can help you make the right decisions and handle the process from start to finish. We have a great blog post here about invoicing as well, which may help you ensure you are including all the right things on your invoices – but if you are fed up with the admin and paperwork, we’re happy to take this off your hands. 
 
Book a call or drop us an email today – we’d love to help you. 
 
 
 
 
 
Written by: 
 
Nicola J Sorrell - 
Effective Accounting 
 
Founder | Xero Champion | IR35 Expert 
Tagged as: Tax Rates, VAT
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