How do you Avoid a VAT Default Surcharge Penalty?

In the current climate many businesses are finding themselves in a position whereby they do not have funds to pay the VAT bill at the end of the quarter. With default surcharge penalties levied at up to 15%, how can you avoid a penalty?

The recent case of Olive Business Solutions Limited considered whether the taxpayer had a reasonable excuse and therefore was not liable to the default surcharge penalty and whether the amount of penalty was disproportionate.

The return was received by HMRC on the due date, 30 November 2012. Payment should have been made electronically by 7 December, but was made by three instalments, on 11 December, 24 December and 4 January 2013. A penalty of £16,337.28, equivalent to 5% of the tax was imposed.

HMRC states that a default surcharge can often be avoided if a “time to pay” agreement is authorised, provided that the taxpayer has contacted HMRC with a view to making a time to pay agreement, in advance of the due date for payment.

In this case, the Tribunal concluded that as the taxpayer had not contacted HMRC prior to the due date to discuss a time to pay agreement a penalty was therefore due. The Tribunal chairman stated that it is not “disproportionate to impose the penalty prescribed by a regime which is not itself disproportionate in circumstances where the person penalised has simply failed to avail himself of the mechanism by which he could have escaped the penalty.”

The key message from this case, as with many before, is that if you are struggling to meet your VAT commitments at the due date, it is imperative to contact HMRC prior to this date to agree a payment plan to avoid any default surcharge penalties.