VAT Non-Compliance Penalties: Imperative I - Don’t Be Late

The European Central Bank Building and the skyline of Frankfurt am Main.

The specific rules vary by country, but wherever you are, VAT non-compliance can result in penalties. From late payment interest to suspension of VAT registration number, and in some cases legal action. This three-part VAT compliance penalties blog series explores key imperatives - timing, accuracy and audit readiness.  

Value Added Tax (VAT) goes by several names. Whether you’re talking Umsatzsteuer in Germany or Moms in Denmark, a value-add tax is charged on the value added to goods and services at each stage of production and distribution, and collected by businesses on behalf of governments.   

Trading cross-border, be that selling via bricks and mortar stores; online purchases enabled by clicks; or buying from an expanded supply chain, brings many benefits. These benefits include access to new markets, creation of new revenue streams, improved economies of scale, and broader supplier choice. However, alongside are new challenges for VAT compliance, including; 

  • Grappling with different VAT registration thresholds, VAT rates and invoicing requirements in each of those jurisdictions.  
  • Adhering to complex VAT rules for cross-border transactions importing or exporting goods and services.  
  • Managing an increasing cost of VAT compliance thanks to additional reporting requirements.  

Consequently, as your business grows it becomes even more important to take VAT compliance seriously, to avoid VAT non-compliance penalties that can be costly both financially and in terms of reputational damage. 

Don’t Be Late  

Fines are Imposed for Failing to File VAT Returns on Time.  

The size of late filing penalties depends on factors including the period of delay and the value of the tax due. In Germany, late filing can result in a penalty of up to 10% of the assessed VAT up to EURO 25,000 plus interest. In the UK, new penalties came into force in January 2023. The new system separates late payment and late submission penalties and introduces a point system - reforming the way penalties and interest is charged. The policy’s intention is to be less punitive where a taxpayer misses an occasional deadline but penalises those that have frequent delays (even if it was for a nil or net refund VAT return).    

Penalties for Late VAT Payment  

These can quickly mount up. Most European countries have a calculation based on a percentage of the overdue amount, which may accrue interest over time. In January 2023 late payment penalties in the UK changed to be based on the percentages of VAT owed. The penalty rate and interest charge increase as time goes on.   

In some European countries as part of VAT non-compliance penalties, if a business repeatedly pays their VAT late, their VAT number may be suspended. Therefore, making it impossible to charge or reclaim VAT until the outstanding VAT has been paid. In France, Germany and Spain, legal action may be taken against the taxpayer. The specific rules and procedures vary from country to country including the seizure of assets and in some cases even criminal prosecution. 

Click here to read the next blog in our series.

Blog Author

Gunjan Tripathi Headshot

Gunjan Tripathi

EMEA Director, Product Marketing

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Gunjan Tripathi is a Director of Solutions Marketing for Vertex. In her role, she helps shape the strategic messaging and course for Vertex's Indirect Tax offerings. She is an experienced Chartered Tax Advisor, specialising in European VAT. Her tax career experiences comprise of consulting with EY, leading compliance at European Shared Service Centre for SC Johnson, Global VAT manager for Endeavor and VAT proposition lead at Thomson Reuters. She holds a Bachelor of Honours in Economics from the University of Delhi, India and a Master of Science in Development Studies from School of Oriental & African Studies from the University of London. She is an Executive MBA scholar at the Warwick Business School and member of the Chartered Institute of Taxation.