Penalties related to UK VAT. Who is at risk, for what, at what level, and how to avoid them?

Registering for UK VAT and obtaining a UK VAT number opens up new opportunities for e-commerce entities operating in the British market. However, having UK VAT comes not only with privileges, but also with responsibilities.. Failure to fulfill them can lead to unpleasant consequences for e-commerce companies. Since January 2023, the British tax authority (Her Majesty Revenue & Customs – HMRC) has introduced a new system of penalties related to UK VAT. What are the penalties and for what?

UK VAT is one of the most complex areas of taxation in the UK. E-commerce companies selling their products in the UK must, among other things, include UK VAT on invoices, apply the appropriate UK VAT rate, settle VAT in the UK with HMRC, submit VAT UK declarations electronically through a program compliant with the Making Tax Digital (MTD) digital tax system, file VAT records digitally.

Failure to meet these obligations regarding UK VAT can result in severe consequences. The new UK VAT penalties complement recent changes in regulations, requiring enterprises registered as UK VAT taxpayers to submit declarations using MTD-compliant means.

When can e-commerce companies be subject to penalties related to UK VAT?

VAT penalties for e-commerce companies in the UK are provided for primarily in the following situations:

• when UK VAT declarations are submitted after the deadline;
• when UK VAT is not paid to HMRC on time.

Penalties for late submission of UK VAT declarations apply on a point system. For each late VAT declaration, an e-commerce company receives one penalty point. After reaching the appropriate threshold, the online store incurs a penalty of:

• £200;
• and an additional £200 for each subsequent late submission of a UK VAT declaration.

Zero UK VAT declarations – if not submitted – also incur penalty points and penalties.

What is the threshold for UK VAT penalty points?

The thresholds for UK VAT penalty points for late submission of UK VAT declarations depend on the frequency with which e-commerce companies should submit UK VAT declarations. In the case of declarations:

• annually – the penalty point threshold is 2, with a compliance period of 24 months;
• quarterly – the penalty point threshold is 4, with a compliance period of 12 months;
• monthly – the penalty point threshold is 5, with a compliance period of 6 months.

Can UK VAT penalty points be reduced or removed?

The total UK VAT penalty points can be reset at any time if the e-commerce company meets both of the following conditions:

• UK VAT declarations are submitted on time or before the payment deadline for the compliance period regarding the frequency of submission;
• Within the last 24 months, the e-commerce company has settled all outstanding UK VAT tax returns.

If, however, a particular penalty point threshold is not reached by the e-commerce entity, each individual point expires automatically after 24 months.

UK VAT and penalties for late payment of UK VAT

E-commerce companies must also consider penalties imposed by HMRC for late payment of UK VAT. These penalties depend on the extent of the delay in payment at the time of receipt by HMRC. The later the payment is made, the higher the penalty imposed on the e-commerce entity. Specifically:

• Overdue up to 15 days – the e-commerce entity can avoid a penalty if the UK VAT payment due to HMRC is made in full or a payment plan is agreed upon within 1 to 15 days.
• Overdue from 16 to 30 days – the first penalty is 2% of the UK VAT due in the 15th day if paid in full or according to the payment plan between days 16-30.
• Overdue exceeding 31 days – the first penalty is 2% of the UK VAT due in the 15th day plus 2% of the UK VAT due in the 30th day.

The second penalty, for failing to meet the UK VAT payment deadline, is calculated at a daily rate of 4% annually for the entire further waiting period for payment. It is calculated based on the date of the full repayment of the outstanding UK VAT tax balance or agreement on a payment plan.

Late payment interest on UK VAT

Since January 1, 2023, HMRC has also charged interest on late payments of UK VAT from the day of delay to the day of full payment.

Late payment interest on UK VAT payments is calculated at the base rate of the Bank of England plus 2.5%.

Making Tax Digital and UK VAT – separate penalty for non-compliance

In addition to the UK VAT penalty system effective since January 2023, rules requiring the use of software compatible with Making Tax Digital (MTD) for keeping UK VAT records and submitting VAT declarations in the UK were introduced in November 2022.
Failure to comply with the new MTD rules regarding UK VAT may result in a penalty of £400 for each UK VAT declaration.

The obligation to register for UK VAT and UK VAT rates

It should be remembered that any penalties for failing to comply with UK VAT settlements and obligations concern e-commerce companies that are VAT taxpayers in the UK. Entities that should register for UK VAT include those that:

• sell goods and services to buyers in the UK, with the total value of this sale within a year exceeding £90,000;
• store goods in the UK and send them to recipients in other countries;
• import goods into Europe through the territory of the UK;
• voluntarily wish to settle UK VAT.

The necessary documents must be submitted 30 days before the first transaction that will be settled according to British rates. Registration for UK VAT is easiest to do online at HMRC – submit an application on the VAT A1 form “Application for Registration – Distance Selling” through the website: https://www.gov.uk/sign-in-vat-account.

There are three UK VAT rates in the UK:

• 0% – concerning products and services such as printed books, magazines, take-away food, children’s clothing and footwear, construction work in new construction, domestic waste collection;
• 5% – includes, among others, supplies of electricity, medical equipment for disabled people, LPG and heating oil for domestic use;
• standard 20%.

VAT in the UK is excluded from insurance, financial, postal, educational, medical, hospital, and recreational services. UK VAT is typically settled in monthly or quarterly declarations.

How to avoid penalties for UK VAT? Use a professional accounting firm!

Do you run an e-commerce business and want to start selling to the UK or already do so, but are afraid of handling settlements and submitting UK VAT declarations and any associated penalties? You can benefit from the support of an accounting firm specializing in UK VAT compliance and avoid many problems!

amavat®, as part of its VAT Compliance service, offers support in registering and settling UK VAT, preparing appropriate declarations and reports, and representing e-commerce companies before HMRC. This way, you can avoid penalties and liabilities associated with UK VAT.

More information about the VAT Compliance service for e-commerce entities settling UK VAT can be found here: https://amavat.eu/vat-compliance-e-commerce/.