A Default Surcharge is a civil penalty issued by HMRC to “encourage” businesses to submit their VAT returns and pay the tax due on time.
VAT registered businesses are required by law to submit their return and make the relevant payment of the VAT by the due date.
A default occurs if HMRC has not received your return and all the VAT due by the due date. The relevant date is the date that cleared funds reach HMRC’s bank account. If the due date is not a working day, payment must be received on the last preceding working day.
Payments on Account (POA)
If a business is required to make POA it must pay them and the balance due with the VAT Return by electronic transfer direct to HMRC’s bank account. The due dates for POA are the last working day of the second and third month of every quarterly accounting period. The due date for the balancing payment is the date shown on the business’ VAT Return. It is important to ensure that payments are cleared to HMRC’s bank by these dates or there will be a default.
Consequence of default
A business will receive a warning after the first default ‐ the Surcharge Liability Notice (SLN). Do not ignore this notice. If you fail to pay the VAT due on the due date within the next five quarters, the surcharge will be 2% of the outstanding tax. The surcharge increases to 5% for the next default, and then by 5% increments to a maximum of 15%. Each default, whether it is late submission of the return or late payment, extends the surcharge liability period, but only late payment incurs a surcharge.
If you can’t pay the VAT you owe by the due date or are having difficulties, contact the Business Payment Support Service immediately.
Special arrangements for small businesses
There are special arrangements if a business’ taxable turnover is £150,000 or less to help if there are short term difficulties paying VAT on time. HMRC send a letter offering help and support rather than a Surcharge Liability Notice the first time there is a default. This aims to assist with any short-term difficulties before a business formally enters the Default Surcharge system. If the business defaults again within the following 12 months a Surcharge Liability Notice will be issued.
There is a minimum of £30 for surcharges calculated at the 10% or 15% rates. There will not be a surcharge at the 2% and 5% rates if it is calculated it to be less than £400. However, a Surcharge Liability Notice Extension extending the surcharge period will be issued and the rate of surcharge if you default again within the surcharge period will be increased.
Circumstances when HMRC will not levy a surcharge
There’s no liability to surcharge if a business:
- submits a nil or repayment return late
- pays the VAT due on time but submit your return late
HMRC will not issue a surcharge in these circumstances because there is no late payment involved. If a business had defaulted previously HMRC will issue a Surcharge Liability Notice Extension extending the surcharge period because the return is late, but they will not increase the rate of surcharge.
A business’ liability to surcharge will expire if a business submits all of its returns and payments for tax periods ending on or before the end of the surcharge liability period on time.
If a business has a reasonable excuse for failing to pay on time, and it remedies this failure without unreasonable delay after the excuse ends, it will not be liable to a surcharge.
There’s no statutory definition of reasonable excuse and it will depend on the particular circumstances of a case. A reasonable excuse is something that prevented the business meeting a tax obligation on time which it took reasonable care to meet. The decision on whether a reasonable excuse exists depends upon the particular circumstances in which the failure occurred. There is a great deal of case law on this particular issue. Please contact us should there be doubt about a reasonable excuse.
Disagreement over a surcharge
If you disagree with a decision that you are liable to surcharge or how the amount of surcharge has been calculated, it is possible to:
- ask HMRC to review your case
- have your case heard by the Tax Tribunal
If you ask for a review of a case, a business will be required to write to HMRC within 30 days of the date the Surcharge Liability Notice Extension was sent. The letter should give the reasons why you disagree with the decision.
Examples when a review may be appropriate are if a business considers that:
- it has a reasonable excuse for the default
- HMRC applied the wrong rate of surcharge
- HMRC used the wrong amount of VAT when calculating the surcharge
- there are exceptional circumstances which mean the default should be removed
A business will still be able to appeal to the Tribunal if it disagrees with the outcome of the HMRC review.
We are very experienced in dealing with disputes over Default Surcharges, so if you feel that one has been applied unfairly, or wish to explore your rights, please let us know.