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HMRC internal manual

VAT Civil Penalties

HM Revenue & Customs
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Default Surcharge: Why a surcharge arises: What is a default surcharge

Section 19 of the Finance Act 1985 introduced a system of tax geared surcharges to encourage businesses to submit their VAT returns and pay the tax due on time. Default surcharge came into effect on 1 October 1986.

A review of the system was carried out in 1992 and, after consultation with trade and professional bodies, changes were announced in the 1993 Budget. The changes were, in the main, liberalising measures aimed at addressing concerns raised during the consultation process.

If a VAT return is not received and / or all the VAT due on that return has not cleared to our bank account by the due date a default will be recorded. Default surcharge came into effect on 1 October 1986 and the first defaults were recorded in period 09/86. The system is, in the main, automated up to and including the recording of defaults and issue of default surcharge notification documents. A trader defaults if the return and/or tax shown as due are not received by the due date.

A Payment on Account (POA) trader defaults if

  • Any of the payments on account have not cleared the Department’s bank account by the due date.
  • The VAT return has not been received and / or the balancing payment due with the return has not cleared the Department’s bank account by the due date.

Notification of defaults and assessments for all traders including POA traders are made only at the end of the accounting period

(This content has been withheld because of exemptions in the Freedom of Information Act 2000) VCP10513

Exclusions from default surcharge processing

In law all VAT registered businesses are subject to the default surcharge system, but in practice the following traders are automatically excluded from surcharge processing by concession

  • traders rendering first period returns (except those transferred as “going concerns” by the VAT 68 procedure)
  • repayment classified traders
  • traders for whom the deregistration indicator has been set
  • insolvent traders
  • section 20 bodies (local authorities)
  • traders for whom the missing trader review (309) has been set.

There are no implications under the Human Rights Act for default surcharge, see VCP10160.