If you don’t submit your VAT return on time, or fail to pay the VAT due on time, HMRC will put your business on the fiscal naughty step. HMRC should tell you that your business is on its watch list by sending you a Surcharge Liability Notice (SLN), and a help letter if this is your first offence.
If you repeatedly file VAT returns late or pay VAT late, the SLNs will carry on arriving and penalties will be charged. These start at 2% of the late-paid VAT (minimum of £400), and the percentage rises each time an SLN is issued until it reaches 15% of the VAT that was paid late. If HMRC receives the VAT payment even one day after the due date, this still counts as ‘late’.
The key to this process is the receipt of an SLN. If the business does not receive an SLN, any default surcharge (i.e. a monetary penalty) issued on the back of that SLN is invalid. HMRC doesn’t keep copies of all the SLNs it issues, but it should keep an accurate list of the address each was sent to and when it was issued.
If you receive a VAT penalty out of the blue, and you weren’t aware your business was in default with VAT payments or VAT returns, you can appeal against the penalty. There have been several cases recently where the tax tribunal has overturned VAT penalties because HMRC couldn’t prove that the SLN was correctly issued.
Tip: if you have problems submitting your VAT return under MTD, make sure you pay your VAT on time, as that will neutralise any fiscal penalty.