Last year, something happened that I wasn’t expecting.
I received a letter from HMRC telling me I would be fined for late payment of my VAT return.
Now I know I paid my VAT return on time. I know it’s on a direct debit, but I also know that HMRC make mistakes.
After a short panic, I realised the letter wasn’t for me. It was the first of many letters we receive when our clients pay VAT late. Confusingly, the letter doesn’t state the client name, just the VAT number, so it was easy for me to have a short panic before I realised what was actually going on!
And, since then, those letters have become a much more common sight.
I used to quite often hear people say “We’ll just pay HMRC a bit later. It’s cheaper than the bank.”
Unfortunately…that’s increasingly not true. HMRC is getting tougher.
For years, many businesses treated HMRC as the creditor you paid last.
Suppliers needed paying immediately. Staff definitely needed paying immediately. But VAT? That could wait a little while.
Historically, the cost of paying HMRC late was pretty cheap. But the rules have changed and the penalties now build up surprisingly quickly.
And VAT is where we’re seeing it most often.
The current VAT penalty regime has two separate parts:
- Late filing penalties
- Late payment penalties and interest
For late payment, HMRC can charge:
- No penalty if paid within 15 days
- A first penalty of 3% on the VAT outstanding at day 15
- Another 3% on the VAT still outstanding at day 30
- A further daily penalty from day 31 onwards
- Late payment interest on top
HMRC’s current late payment interest rate is 7.75%.
So, let’s take a practical example.
If your VAT bill is £25,000 and it remains unpaid for 60 days, the costs could look something like this:
- 3% penalty at day 15 = £750
- Another 3% penalty at day 30 = £750
- Daily penalty from day 31 to day 60 = around £205
- Interest over the 60 days = around £320
That’s roughly £2,025 extra on top of the original VAT bill. Ouch!
Suddenly, using HMRC as an “overdraft” starts becoming a pretty expensive form of borrowing.
And that’s before we even get to the stress, letters, time spent dealing with it…or the potential impact if you need HMRC to be helpful later!
You’ve simply got to remember – VAT money in your bank account isn’t really your money.
It can feel like it is. It sits there in the same bank account as everything else. It helps the balance look healthier than it really is. It can be very tempting to use it to pay suppliers, wages, or that one annoying supplier who has been chasing you all week.
But if you spend it, you’re really borrowing from HMRC.
And HMRC is not a friendly lender.
So what should you do?
- Put VAT aside as you go, ideally into a separate bank account.
- Don’t wait until the return is due before thinking about the cash.
- Use Xero or your bookkeeping software to keep an eye on the VAT liability during the quarter.
- If you know you can’t pay, speak to HMRC early about a Time to Pay arrangement.
- Don’t ignore the brown envelopes. They rarely improve with age.
This is also why proper cashflow planning matters.
A business can be profitable and still get into trouble if cash isn’t managed properly. VAT, PAYE, Corporation Tax, loan repayments and dividends can all hit at awkward times. If you’re only looking at the bank balance today, you can easily miss what’s coming next month.
And the VAT quarter has a horrible habit of arriving just when you’ve started feeling comfortable.
So, if VAT payments keep catching you out, it might not just be a VAT issue. It might be a wider cashflow planning issue.
And that’s something we can help with.
Cheers
Jon