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Filing a late VAT return for a contractor limited company

Contractors who file their contractor limited company’s VAT return late or make late payment to HMRC can find themselves incurring steadily increasing penalty surcharges. Not only that, but such behaviour also puts the contractors’ company on the taxman’s radar as a potential investigation target.

The first time a contractor submits their VAT return late, or makes a late payment, they will usually receive a warning letter with no penalty. So, one mistake is allowed. However, subsequent late payments without good reason incur a surcharge on the VAT owed, which increases as the number of late filings and payments increase. And all the time a contractor is waving a flag to HMRC saying ‘please come and investigate me!’

It’s worth seeing things from the taxman’s point of view, to understand why paying VAT late is taken so seriously. Income tax and corporation tax is money you or your company have earned, a proportion of which must be paid to the taxman. VAT, on the other hand, is already the taxman’s (or, more properly, the government’s) money. So, with VAT, the contractor is simply acting as a tax collector on HMRC’s behalf, and the taxman expects to have that money when it is due.

Penalties for late payment – surcharges

So, what happens if you are late filing and paying your VAT return? After the first late filing, the contractor has no penalty to pay, but will find their limited company is now in a ‘surcharge period’ lasting 12 months. Further defaults in this period will result in a cash penalty.

A second late filing and late payment within the surcharge period will result in a penalty surcharge of 2%, which the contractor’s limited company must pay. That’s 2% of the total VAT owed, or estimated to be owed when the VAT return and payment was due.

And for each additional late filing within the period, the surcharge increases to 5%, then 10% and finally 15% of the estimated unpaid VAT. At each new default, the clock is started again on the 12-month surcharge period.

HMRC will generally respond sympathetically if a contractor has a genuine reason for filing a late VAT return and payment, and will allow the contractor to correct the situation

‘Reasonable excuses’ for late VAT payment

Contractors have 30 days from the date of any surcharge notice to appeal to their VAT office against the judgement. HMRC will generally respond sympathetically if a contractor has a genuine reason for filing a late VAT return and payment, and will allow the contractor to correct the situation. So early contact with HMRC is advisable in this instance.

Genuine excuses, such as records being lost or stolen, computer equipment breakdowns or if the contractor responsible for preparing the return is taken seriously ill, will generally be accepted by HMRC.

But HMRC won’t accept excuses that are based on relying on someone else, such as an accountant, to do their job properly. The responsibility remains that of the contractor’s limited company, which must pay any surcharges.

Inability to pay

Normally, an inability to pay is not an acceptable excuse. However, some contractors who have substantial monthly invoices and whose clients, or agencies, do not pay on time, may find VAT becomes due before they have been paid.

In some tribunal cases, and where the contractor informs HMRC as soon as they know this will happen, this situation has been accepted as a reasonable excuse. HMRC’s response is usually to ask for the return to be completed and submitted and payment made later.

Contractors who are in genuine financial trouble and cannot pay their VAT bill when it falls due are urged to contact HMRC’s Business Payment Support Service. HMRC are generally quite receptive to putting a realistic payment plan in place.

But when it comes to VAT, it’s worth remembering that it’s not your or your company’s money. So if you don’t pay it over to HMRC on time, you shouldn’t expect a sympathetic hearing!

Published: 23 July 2009

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