Getting VAT right is a complex endeavour for any business, big or small. Understanding the requirements, thresholds, and timelines is crucial for maintaining compliance and avoiding unnecessary penalties. The necessity to register for VAT and the implications of late registration are of particular importance.
VAT registration becomes a requirement once a business’ taxable turnover exceeds a certain threshold within a rolling 12-month period. However, businesses occasionally find themselves late to register, either due to a misunderstanding of the rules or inadvertent omission. The repercussions of late VAT registration can be significant, impacting not only a business’s finances but also its operations and reputation.
In this comprehensive guide, we delve into the intricacies of VAT registration, exploring the reasons for late registration, the steps needed to rectify such situations, and the penalties involved. We also examine the impact of late VAT registration on business operations and the necessary steps for future compliance and monitoring.
Understanding VAT Registration
Value Added Tax, commonly known as VAT, is a form of tax applied to most goods and services provided by VAT-registered businesses in the United Kingdom. The VAT registration threshold, as of the time of writing, is a taxable turnover of £85,000 within any rolling 12-month period.
A rolling 12-month VAT period is a continuous review of the previous 12 months of trading. After your first year in business, at the end of each month, you add your latest month’s turnover to the total figure and remove the oldest month. It is important to remember that you need to register for VAT when your taxable turnover exceeds the registration threshold within this rolling period, not an accounting period.
If a business exceeds the VAT registration threshold, it becomes legally obligated to register for VAT with Her Majesty’s Revenue and Customs (HMRC). The VAT registration process involves reporting and paying VAT to HMRC on all taxable sales less VAT on any taxable purchases, most likely on a quarterly basis, depending on the VAT accounting scheme chosen.
Once a business is VAT-registered, it charges VAT on its sales, known as ‘output tax,’ and can reclaim VAT paid on its purchases, known as ‘input tax.’ The difference between the output tax and input tax for a VAT period is either paid to HMRC or reclaimed, depending on whether the output tax exceeds the input tax or vice versa.
It’s essential to know that a business should include VAT on all sales back to the date it should have registered. This requirement applies even if no VAT was charged to the customers at that point, meaning businesses could potentially face cash flow issues or a decrease in profits if they can’t reclaim the VAT from customers, especially those customers who aren’t VAT registered. Therefore customers selling direct to consumers are more likely to be adversely affected by a late VAT registration.
The introduction of the ‘Making Tax Digital’ initiative in April 2019 means that all VAT registered businesses are now required to maintain their accounting records on a digital platform. VAT returns should be submitted for each quarter, with the deadline for filing and payment being one calendar month and seven days after the end of the VAT quarter. For instance, if your VAT quarter ends on 31st March, you would need to file the return by the 7th May.
It’s clear that understanding and maintaining VAT registration is a vital aspect of running a compliant and profitable business. However, even the most conscientious businesses may find themselves late to register for VAT, leading us to explore the reasons and implications of this common issue.
Reasons for Late VAT Registration
Late VAT registration can occur for various reasons. One of the most common reasons is a lack of awareness or misunderstanding of the registration threshold or when it applies. For instance, some businesses might mistakenly believe that they only need to register for VAT at the end of an accounting period when their turnover exceeds the threshold, rather than during any ‘rolling’ 12-month period. This misunderstanding could lead to unintentional non-compliance.
Another frequent cause of late VAT registration is a result of unexpected or seasonal spikes in sales which could push a business over the threshold without its awareness.
In some cases, a business may have a ‘reasonable excuse’ for late registration. The term ‘reasonable excuse’ doesn’t have a legal definition, but HMRC generally considers it as an unexpected or unusual event that was beyond the business’s control and prevented it from registering on time. Examples of reasonable excuses may include serious illness, bereavement, or doubt about the liability of supplies. However, it’s important to note that not being able to afford to pay the VAT or acting in good faith are not considered reasonable excuses by HMRC.
Sometimes, businesses may not even realize they need to be VAT registered because they underestimate their taxable turnover or fail to take into account all their taxable supplies (in particular reverse charge purchases which are very relevant for an e-commerce business selling on Amazon or Shopify or spending significant amounts on advertising). This can be particularly true for small businesses or startups that may not have a dedicated accounting or finance function.
In all of these cases, the result is the same: the business fails to register for VAT when it should, triggering penalties and potentially leading to other complications down the line.
Steps to Rectify Late VAT Registration
If a business realizes that it has missed the deadline to register for VAT, it’s crucial to take immediate action. Late VAT registration can result in significant penalties and complications, but timely actions can help to mitigate these effects. Here are the steps you need to take to rectify late VAT registration:
- Assess the Situation: First, assess how much VAT you owe based on the time from when you should have registered for VAT. This will help you understand the magnitude of the issue.
- Apply for VAT Registration: Apply for VAT registration through the HMRC’s website. Make sure you keep records of all relevant transactions because you will need to submit VAT for all sales from the date your business should have registered, even if no VAT was charged to your customers at that point.
- Consider ‘Liable No Longer Liable’ (LNLL): If your business exceeded the VAT registration threshold in the past but later dropped below the deregistration threshold, you may not owe VAT for the entire period. This situation, referred to as ‘Liable No Longer Liable’ (LNLL) by HMRC, may limit your VAT liability to only the periods when your turnover exceeded the threshold. Address this issue with HMRC at the time of your VAT registration application to potentially reduce your VAT liability. Note that depending on how late you have identified your late registration, this may not be an option.
- Pay Your VAT and Penalties: Once you’ve registered, you will need to pay the VAT you owe from the point of registration. Penalties for late registration vary depending on how late you were in registering.
- Communicate with HMRC: If there’s a reasonable excuse for your late registration, communicate this to HMRC. If they agree, this will help to minimise any penalty. Even if your case falls short of a reasonable excuse, HMRC may still reduce the penalty if there are mitigating circumstances.
- Claim Input Tax: HMRC allows businesses to claim input tax. This refers to the VAT that you could have reclaimed on your purchases if you had been VAT registered during those periods. If records are not available due to the passage of time, you could request HMRC to exceptionally agree to applying an appropriate Flat Rate Scheme percentage to the sales made during the affected period instead of claiming any input tax.
- Ensure Future Compliance: Lastly, to avoid similar situations in the future, ensure you have a system in place to monitor your turnover and understand when you need to register for VAT.
By following these steps, businesses can rectify their late VAT registration and minimise additional penalties or complications down the line.
Dealing with Penalties and Fines
Dealing with the penalties and fines associated with late VAT registration can be a significant burden for businesses. It’s crucial to understand how these penalties are calculated and how you can mitigate them.
The penalties for failing to register for VAT on time depend on the degree of lateness in registering:
- Not more than 9 months late: The penalty is 5% of the due VAT.
- More than 9 months but not more than 18 months late: The penalty is 10% of the due VAT.
- More than 18 months late: The penalty is 15% of the due VAT.
The minimum penalty for late VAT registration is £50, irrespective of the delay or VAT due.
Penalties are calculated based on the VAT due from the point the business should have registered. Therefore, in addition to the penalty, you will need to pay the VAT due from the point of registration. If you were late in registering, this could lead to significant costs.
However, the law provides some recourse to businesses that have reasonable excuses for their late registration as detailed above. If HMRC agrees that your business had a reasonable excuse, you will not be liable for a penalty.
It’s important to note that the inability to pay, acting in good faith, or making genuine mistakes are not considered reasonable excuses. However, even if the circumstances fall short of a reasonable excuse, there may still be grounds to mitigate the penalty. This will depend on the specific circumstances of your case, and HMRC will consider all relevant facts when determining mitigation.
In conclusion, while the penalties and fines for late VAT registration can be severe, understanding the calculation and mitigation factors can help you navigate this challenging process. It is advisable to consult with a professional advisor or directly with HMRC for personalised advice.
Impact on Business Operations
Late VAT registration can have several implications for the operation of your business.
Firstly, once you’re required to register for VAT, it must be included in all sales dating back to when you should have initially registered. This remains the case even if no VAT was charged to your customers at that time. Depending on the nature of your clientele, this could pose varying degrees of problems.
If the majority of your customers are VAT registered themselves, this issue could be somewhat mitigated. You can raise a VAT-only invoice for these customers and collect the payment. However, the speed at which your customer pays the invoice may cause temporary cash flow issues. These could be some what mitigated by opting to file VAT returns on a cash basis.
If, on the other hand, the majority of your customers are not VAT registered, you’ll be faced with a more complicated issue. In such a case, you cannot pass the VAT onto your customers, but you’re still required to pay it to HMRC. This can cause not only cash flow problems but also reduce your overall profits due to the additional costs.
On a more strategic level, late VAT registration can disrupt your business operations, particularly if it leads to an investigation by HMRC. It may consume valuable time and resources that could be better spent on your core business operations. It can also damage your business’s reputation, especially if the reason for late registration is due to oversight or poor financial management.
However, it is important to note that if your business fluctuated above and below the VAT threshold during the past years, you may be eligible for the Liable No Longer Liable (LNLL) status. This means that VAT would only need to be declared for the periods where your business’s rolling turnover required VAT registration. This can significantly mitigate the impact of late VAT registration on your business.
In conclusion, while late VAT registration can have considerable effects on your business, it is possible to mitigate these effects and manage the situation effectively.
Future Compliance and Monitoring
Once your business is registered for VAT, it’s crucial to ensure compliance with VAT rules going forward to avoid future issues.
One of the key requirements introduced in April 2019 is ‘Making Tax Digital.’ It mandates all VAT-registered businesses to maintain their accounting records with a digital link to their VAT returns. This facilitates a more transparent and efficient way of recording, reporting, and paying VAT.
Each quarter, you are required to complete a VAT return. It’s crucial to meet the submission deadline, which is one calendar month and seven days after the end of the VAT quarter. For example, if your VAT quarter ends on March 31st, your VAT return must be filed by May 7th. This deadline also applies to the payment of any VAT due to HMRC.
If you set up and pay by direct debit, there’s a three-day extension before payment is taken. For example, if your VAT quarter ends on March 31st, the payment will be taken on May 10th if you are using direct debit.
For a smooth transition into compliance, you can adopt tools and processes to monitor your business’s taxable turnover in real time, alerting you to any potential VAT threshold crossings. Good bookkeeping practices and staying informed about current VAT legislation are also key.
Remember, it’s always recommended to seek advice from a VAT professional or a tax adviser to ensure complete compliance with VAT regulations and minimize potential penalties. This will ensure that your business remains in good standing with HMRC and help avoid any potential pitfalls in the future.
Late VAT registration is a situation that can lead to penalties and complications in the operations of a business. It can be an expensive oversight with repercussions extending beyond immediate financial costs. However, with a clear understanding of VAT registration rules, diligent monitoring of your turnover, and timely action when the threshold is reached, businesses can avoid these pitfalls.
If you find yourself in a position of late registration, it’s important to act promptly. Mitigate the impact by registering immediately, paying any due VAT, and considering your options for reducing penalties. In some instances, the concept of ‘Liable No Longer Liable’ (LNLL) may apply, which could limit the impact of late registration on your business.
Remember that tax laws are complex and navigating them can be challenging. It’s always advisable to consult with a tax professional or VAT adviser who can guide you through the process, help you interpret the laws and regulations, and support your business in maintaining compliance.
Don’t set sail on the VAT sea alone. As VAT accountants for e-commerce businesses, our service is designed to support and assist your business. Get in touch with us today, and let us chart a course to success together on 01942 725419.