Late VAT registration penalties

Late VAT registration is a common issue and HMRC takes it seriously. Here is what happens and what you can do about it.

When you are required to register:

You must register for VAT when your taxable turnover exceeds the VAT registration threshold, which is currently £90,000 (from 1 April 2024). There are two tests. The historic test requires you to register if your taxable turnover in the past 12 months has exceeded the threshold. You must notify HMRC within 30 days of the end of the month in which you exceeded it. The future test requires you to register if at any point you expect your taxable turnover to exceed the threshold in the next 30 days alone. You must notify HMRC by the end of that 30-day period.

What happens if you register late:

1. Backdated registration. HMRC will register you from the date you should have been registered, not from the date you actually applied. This means you will have a period during which you were legally required to charge and account for VAT but did not do so.

2. VAT liability on past sales. You become liable for the VAT that should have been charged during the period of late registration. If you did not charge VAT to your customers during that period, HMRC will treat your sales as VAT-inclusive, meaning the VAT comes out of the price you received rather than being added on top. So if you sold something for £1,000, HMRC will treat £166.67 of that as VAT (at the standard 20% rate). This is a direct cost to you.

3. Default surcharge or penalty. HMRC can impose a failure to notify penalty under Schedule 41 of the Finance Act 2008. The amount depends on whether the failure was careless or deliberate, and whether you told HMRC or they discovered it themselves. The penalty is calculated as a percentage of the potential lost revenue, which is the VAT that should have been paid during the period of late registration. The percentages range from 0% for an unprompted disclosure of a non-deliberate error up to 100% for a deliberate and concealed failure that HMRC discovers. In practice, for a genuine oversight with an unprompted disclosure, HMRC will often reduce the penalty significantly or even to nil.

4. Interest. HMRC will charge late payment interest on the VAT that should have been paid during the late period.

5. Input tax recovery. On the positive side, you can reclaim input VAT on goods you still held at the date of registration and on services received within the six months before your effective date of registration, provided the normal conditions for input tax recovery are met.

Practical steps if you realise you are late:

1. Register as soon as possible. The longer the delay, the greater the penalties and the more VAT you will owe.

2. Make an unprompted disclosure. Telling HMRC yourself before they contact you results in significantly lower penalties than if they discover the failure through a compliance check or other means.

3. Gather your records. Work out when you crossed the threshold and calculate the VAT that should have been accounted for. You will need to prepare backdated VAT returns.

4. Consider whether you can recover any VAT from customers. In some cases you may be able to issue retrospective VAT invoices to VAT-registered customers who can reclaim the VAT, but this depends on your contracts and the commercial relationship. For sales to consumers, this is generally not practical.

5. Check whether the flat rate scheme or any other simplification would have applied or might apply going forward.

6. If the amounts involved are significant or the period of late registration is long, consider getting professional help with the disclosure and penalty negotiations. HMRC does have discretion in how penalties are applied, and a well-presented case for reasonable excuse or the quality of the disclosure can make a material difference.

Reasonable excuse:

If you have a reasonable excuse for the late notification, the penalty can be reduced or removed entirely. HMRC sets a high bar for this. Ignorance of the law is not generally accepted, but genuine circumstances such as serious illness, bereavement, or reliance on a professional adviser who failed to advise you correctly may qualify.

The key message is that the sooner you act, the better the outcome. An unprompted, cooperative approach to HMRC will almost always result in a significantly better penalty position than waiting for them to find out.