Avoiding Penalties: Top tips for VAT compliance.

VAT compliance is one of the more challenging parts of the tax system that businesses have to contend with, so it is natural to worry about making mistakes and having to pay a penalty. But there are ways to mitigate the risk of making mistakes. Keep reading to find out some of these strategies.


VAT penalties

First, let us look at the VAT penalty system to know what we are dealing with. At the beginning of 2023, HMRC introduced a new VAT penalty system, separating penalties into two: one for late submissions and one for late payments.

Both are based on a points system, just like the points system for your driving licence: get too many points, and a penalty kicks in.


Penalties for late submissions

For every VAT return that you do not file on time, you receive one penalty point. Here is how many points you can get before you receive a penalty:

  • Monthly VAT returns – 5 points
  • Quarterly VAT returns – 4 points
  • Annual VAT returns – 2 points

Fortunately, your first-ever VAT return will always be exempt from getting a penalty point.

Penalties are £200, but every subsequent late return will incur another £200. However, you can reset your points by being on time with your returns: 6 months for monthly returns, 12 months for quarterly returns, and 24 months for annual returns.


Penalties for late payments

There are two types of penalties for late VAT payments: fixed and daily penalties. They work together, with fixed penalties kicking in first and being ‘topped up’ by daily penalties if you have failed to pay.

Specifically, you have to pay a fixed penalty of 2% of the amount you owe if your payment is between 16 and 30 days late. There is no penalty on payments up to 15 days late.

If your payment is late after 31 days, your fixed penalty will be 4% instead. However, you will also have to pay a daily penalty of 4% per annum on the amount owed.

HMRC also charges late payment interest, also known as default interest, which is charged at the Bank of England base rate plus 2.5%.


Avoiding VAT penalties

Businesses can take several measures to avoid VAT penalties for late submissions and payments and ensure VAT compliance.

Submitting VAT returns on time:

  • Set reminders: Use calendars and software to set up reminders for filing deadlines.
  • Allocate time: Ensure you give yourself enough time to prepare and review returns before the deadline to avoid last-minute rushes or errors.
  • Use software: Cloud accounting software can seriously speed up the submission process by automating calculations.

Paying VAT on time:

  • Cashflow management: Monitor your cashflow effectively to ensure that you have the funds necessary to cover your tax when it is due.
  • Set aside funds: You could always put aside funds specifically for VAT payments and segregate them from your operational funds to avoid accidentally using them for something else.
  • Communicate with HMRC: If you face significant difficulties, you should discuss your payment options with HMRC, as they may be able to help.

And last but not least, feel free to speak with an accountant or financial adviser. Not only will they be able to help you with your VAT submissions, but with your payment planning. Worrying about penalties will be a thing of the past.

As VAT accountants, Fairman Keable provide you with expert guidance and assistance, ensuring that your business meets its obligations while maximising opportunities for tax savings.

We combine expertise, technology, and attention to detail to ensure your VAT compliance is streamlined and optimised. VAT can be confusing and stressful for the modern business owner, but it doesn’t have to be.

As your VAT accountants, let us handle your responsibilities to give you peace of mind and help you make the most of the opportunities in front of you, so you can focus on your business.

Need help with your VAT compliance? Get in touch with us today.

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