Stream running through the countryside
VAT Returns: Default Surcharge Notices
Robert Marchant
11/07/2017
Stream running through the countryside
The Default Surcharge Notice is issued for late payment or submission of a VAT Return. It is one of the more common financial penalties issued by HMRC. It can be thought of as a ‘late fee’ and is a penalty based on how much tax was due to HMRC in the return that was late.

The Default Surcharge Notice is issued for late payment or submission of a VAT Return. It is one of the more common financial penalties issued by HMRC. It can be thought of as a 'late fee' and is a penalty based on how much tax was due to HMRC in the return that was late.

Practical tip: the deadline for submission and payment is one calendar month after your 'VAT period' ends. If you submit VAT returns online, then the deadline is extended by an additional 7 days (i.e. if your VAT return period ended on 31 May, then the deadline will be 07 July).

Recurring Default Surcharge Notices can become a significant cost to your business if the underlying cause is ignored. If you are not sure why you have been receiving Default Surcharge Notices, or need help responding to one, then our team can help.

How much Default Surcharge penalty will I need to pay?

As with most HMRC penalties, the amount charged is a percentage of the tax due. The penalty percentage increases for each late submission or payment. Starting at 0% as a warning, each subsequent late submission increases the percentage to 2%, 5%, 10% and finally 15% of the tax due to HMRC. Once it hits 15%, the Default Surcharge penalty will remain there until you leave the 'Default Surcharge regime.

How long does it last for?

The Default Surcharge regime lasts 12 months from the most recent late submission or payment. If you are late within those 12 months, then the regime gets extended. Once you have gone a whole year without being late, you leave the Default Surcharge regime and everything resets.

Is there anything I can do about it?

All HMRC penalties can be appealed against, including Default Surcharge, but you have to demonstrate that you took reasonable care to submit the return/make the payment on time. This is an all or nothing approach, a successful appeal will result in it being cancelled, there is no mitigating the amount of the penalty.

Unfortunately, HMRC do not accept excessive workload as a valid reason to cancel the Surcharge. Most tribunal appeals relating to a Default Surcharge are ruled in favour of HMRC, with very few reasons being seen as reasonable enough to cancel the penalty.

Reasons that have been accepted as 'reasonable' include:

  • documents being lost either through theft, fire or flood
  • serious illness or bereavement at the time of submission
  • expecting to receive payment from a customer before the due date, but the customer does not pay. The resulting lack of funds may be considered to be a reasonable excuse.

Reasons that are not accepted as 'reasonable' include:

  • having insufficient funds to pay HMRC, aside from the scenario described above. Unsuccessful loan or overdraft applications are not considered to be 'reasonable' for not paying on time
  • being on holiday at the time the VAT Return was due
  • not knowing what the payment date is.

Your most effective option will be to prevent the Default Surcharge from recurring. Do you have processes in place to make sure your returns are submitted on time? This could be as simple as marking your VAT return due date on your calendar as a reminder.

Practical Tip: in our experience, calling HMRC before the due date to agree a 'time to pay' arrangement in advance can result in the Surcharge being cancelled once payment has been made.

I made payment only one day late, yet have still received a penalty. Is there anything I can do?

Where payment has been made late, HMRC will impose a Default Surcharge penalty, regardless of how much the penalty amount is.

Historically, there used to be an argument of 'proportionality' against the Default Surcharge when the penalty charge was high and payment was made only a day late. Where the penalty amount was 'excessive' compared to the lateness of the submission some businesses successfully appealed against the surcharges.

Unfortunately, the case of Trinity Mirror cemented that the Default Surcharge will apply to payments made even one day late, regardless of the penalty value. In the case, Trinity Mirror were one day late with payment to HMRC and so received a £70,000 Default Surcharge penalty. An appeal was made based on 'proportionality' of the penalty, however, the Court of Appeal eventually dismissed the appeal. This ruling is binding to everyone and effectively prevents successful arguments for cancellation based on the penalty amount being disproportionate to the error.

What do I do next?

If you have received a Default Surcharge Notice and have questions, call our VAT team on 020 7843 7100.

Contact us

Robert Marchant
Robert Marchant
Partner, VAT
London