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Running a business:
Why you need to pay your VAT on time

If you 'default', ie if do not pay your VAT on time or if you are late submitting your return, then you will come within the default surcharge system. This works as follows:

The first time you default, you will be sent a surcharge liability notice. This will warn you that if you default again during the surcharge period (the next 12 months) you will be need to pay a surcharge.

If you do default during this period, you will need to pay a surcharge of 2% of the VAT due, and your surcharge period will be extended so that it lasts for a further year. On further defaults the surcharge increases to 5% then 10% and finally 15% of the outstanding VAT.

There is a minimum surcharge of �30, and if the surcharge rate is 2% or 5% then surcharges should not be issued for amounts of less than �400.

If you have a reasonable excuse, you may be able to appeal against the surcharge. Reasonable excuses include the following:

computer breakdown just before or during the preparation of your return;
illness of the person responsible for preparing the return where no one else could complete it;
the person responsible for preparing the return leaving at short notice and before you could find someone else to complete the return;
an unexpected cash crisis (something catastrophic such as withdrawal of overdraft facilities, insolvency of a large customer, fraud or fire);
loss of the records of the current period, for example following a fire or theft.

Surcharges can be very expensive. Whenever you receive a surcharge liability notice you need to take it very seriously. If you disagree with it, write back straight away. If it is fair, tighten up your procedures to ensure that you so not default again.