What happens if you can’t pay VAT on time and how to avoid it
Staying one step ahead of HMRC can be difficult when you’re doing a million other things at once, but most businesses will agree that there’s nothing worse than being unable to pay VAT or missing an important payment deadline.
In this blog, we’ll outline what happens when you don’t pay VAT on time but, more importantly, we’ll also look at some of the underlying causes and how you can avoid missing important VAT deadlines. That way, we hope to put the emphasis on the benefits of good financial management, rather than the consequences of bad financial planning.
The origins of missing VAT payments
This question always starts by looking at why businesses miss VAT deadlines. This is often because they cannot afford to pay VAT, which points to inherent or systemic cashflow problems that could be caused by a wide variety of different reasons and inefficiencies.
When companies fail to stick to financial/strategic plans or worse, they don’t have any such plan in place, it often becomes difficult to manage cashflow and stay on top of payments. Once cashflow issues start arising, it’s often too late already. These issues usually have their roots in bad financial management, whether that be an insufficient bookkeeping resource, a lack of time to keep records up to date, or other cashflow problems.
While reasons are often varied, the result is often the same: missing deadlines and defaulting on important payments. Staying ahead of HMRC penalties and crucial deadlines starts with having a financial plan. If you’re interested in reading more about this, then check out our blog about constructing a business plan.
What are the penalties of missing VAT payments?
If HMRC do not receive your VAT returns or receive the right amount by the deadline, then you will enter a 12-month ‘surcharge period.’ If you default again on this payment during these 12 months, then this period can be extended for another 12 months, which often includes another ‘surcharge’ on top of the VAT that you already owe.
Surcharges are always calculated based on a percentage of the VAT that is outstanding. Consult the table below (from HMRC) if you want some more specific information on how the surcharge is calculated and the rate at which it increases:
How to avoid missing VAT payments in the first place
Missing deadlines always has an origin, and we believe that correct financial management must be planned for. More than anything, it doesn’t just happen overnight. You’ll need access to financial advice from a Finance Director that should inform the rest of your business decisions. More information on this can be found in our recent blog.
Planning is crucial, and doing it right will allow you to take various factors into account, like cashflow management, revenue streams, and asset analyses – all of which will contribute to the financial stability of your company. Furthermore, your accountant could also help you put payment plans in place, if you are suffering from a short term cash flow error. Financial forecasts can also help when analysing whether your business will be able to afford certain payments and what cut backs are required to improve your cashflow. A good financial forecast offers you the opportunity to anticipate cashflow problems and deadlines by making changes that have an impact today.
Contact Defacto-FD today
Finding out you can’t pay VAT should never be something that ambushes you last minute. It’s a nasty surprise that no business should have to endure – that’s why Defacto-FD provide a Finance Director service that is both flexible and useful. It allows you to receive the specialist advice every business needs, without paying for a service you can’t afford.
Filing VAT may seem like a simple affair, but it’s only after good financial planning and forecasting that it becomes a simple administrative task. Don’t ignore the warning signs – it could be the difference between stagnation, growth, and decline. Above all, don’t let it get to the point where you are missing VAT payments. Contact Defacto-FD if you want help staying on top of your VAT payments or require specialist Financial advice.