As with so many things involving HMRC, failing to file and pay your VAT on time can result in penalties. VAT penalties are referred to as surcharges and you must have failed to meet your responsibilities at least twice before you incur them. Either failing to file or pay on time counts as a failure, though doing both for the same return only counts as a single failure for surcharge purposes.

The first time you fail to pay or file on time, you will simply get a letter reminding you of your statutory duties. If your annual turnover is less than £150,000, then your second failure will generate a similar letter. If your annual turnover is higher, then the second failure will be subject to a surcharge. From the third failure onwards, all VAT registered entities will be subject to surcharges. Surcharges are a percentage of the VAT payable, with the percentages rising with each subsequent failure. You need a clean record for a full 12 months before the system resets. 

With all the different activities required to keep a business running, it is easy for matters not directly related to customer work to be given low priority. Whilst making sure VAT is not a low priority is important, there are several ways you can make it less likely you will be hit by a surcharge. 

Deregister for VAT
A business are only required to register for VAT when its annual turnover is over £85,000, though it is possible to register before then. Once a business is registered it can deregister if its annual turnover falls below £83,000. If VAT obligations are proving onerous, and your turnover is below these limits, then the simplest solution is to deregister for VAT. If you are slightly over these limits it may even be worth scaling back your business slightly to meet them. Where your customers are mostly private individuals, for whom VAT is simply part of the price, you may even end up better off by keeping your prices the same without having to pay out a proportion to HMRC.

Pay using online banking
Payments through online banking will reach HMRC the same or next day depending on when you initiate the payment. This means that you can keep the money for as long as possible whilst still meeting the deadline. You will need to allow 3 days if you make payment online using a debit card or corporate credit card or if you go into your bank and building society to make the payment. 

It is no longer possible to pay by cheque unless you have the rare exemption from online filing. While HMRC may still accept a payment by cheque, delays in the post and in processing a cheque will add an indeterminate delay to the payment being recorded.

Use the cash accounting scheme
Provided you have annual turnover below £1.35 million, which will apply to most small businesses, then you can use cash accounting for VAT. This means that you only need to account for VAT on your sales when you have actually received money from your customers. This means you are more likely to have funds available to pay your VAT bill when it falls due. You can also only claim VAT on your purchases when they are paid, so it can be worth planning to make your payments to suppliers at the end of the quarter to claim as early as possible. 

Read letters from HMRC
Those brown envelopes dropping through the door can be daunting but ignoring them is rarely wise. Appeals against an incorrect surcharge must be made promptly to get them overturned. Ignore them instead and you risk higher surcharges arising from later genuine mistakes. 

Arrange Time to Pay
If you simply don’t have the cash to pay your VAT bill on time, there is a final option to avoid being subject to a surcharge.  If you contact the HMRC Business Payment Support Service on 0300 200 3835 you might be able to arrange Time to Pay. They will ask detailed questions to confirm you are genuinely unable to pay for reasons outside your control. If they are satisfied with your answers, then they will agree a payment plan. Provided this is in place before the due date, this will be accepted as paying on time even if some of the agreed payments occur after that date. 

There is no substitute for planning ahead for business filings to HMRC. Putting a few of the suggestions in this article in place should help make that as easy as possible. 

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