Why Do I Need to Register for VAT and What Happens if I Don’t?
Whether you’re a small business owner or an established company, it’s crucial to be aware of the legal requirements, consequences, and benefits of registering for VAT.
If you are not VAT registered, you still need to pay VAT on your purchases but cannot reclaim it.
We’ll explore the question, “Why do I need to register for VAT and what happens if I don’t?” by discussing the legal requirements, consequences of not registering, and the pros and cons of voluntary VAT registration to help you make informed decisions for your business.
Understanding VAT Registration
Value Added Tax (VAT) is a tax that is charged on goods and services provided within the UK by registered businesses.
Similarly, services and products that are imported from European Union and non-EU countries are also subject to this tax.
It is mandatory to register for VAT if your taxable turnover in a 12-month accounting period reaches the registration threshold.
But what exactly is taxable turnover, and how does the registration threshold come into play?
Taxable Turnover and Threshold
Taxable turnover is defined as the total value of taxable supplies made by an individual or entity in the context of their business activity, excluding VAT.
The threshold for registration for Value Added Tax (VAT) is £85,000 tax year for any 12 months. This means that if your business’s taxable turnover exceeds £85,000 tax year in a 12-month period, you are legally obliged to register for VAT.
So, how does this affect VAT registered businesses?
VAT Registered Businesses
When a business is registered for VAT, it can reclaim VAT it paid on purchases and charge VAT to customers. This allows businesses to potentially increase their profit margin, as they can claim back the VAT they have paid on sales of goods and services used in the course of their business activity.
Businesses that are not VAT registered cannot reclaim any of the VAT they pay. Hence, it is important to register for VAT in order to take advantage of these tax breaks.
Not registering for VAT when required can also lead to serious consequences, including civil evasion penalties and serious late registration and payment penalties.
Consequences of Not Registering for VAT
The repercussions face penalties of not registering for VAT when required can be severe. Failure to register can result in penalties and fines, severe penalties which can become more severe with time.
In addition, not registering for VAT can negatively impact your business’s reputation and may even lead to a tax investigation by HMRC. So, what are the specific penalties imposed on businesses that fail to register for VAT?
Civil Evasion Penalty
The civil evasion penalty is imposed on businesses that fail to register for VAT on time. This penalty is equal to the amount of VAT avoided and increases daily from the date of registration.
HMRC has been known to take mitigating circumstances into account when issuing penalties. In these cases, the minimum penalty amount can be reduced.
The civil evasion penalty serves as a strong deterrent for businesses that may consider evading VAT registration.
Late Payment Penalties
Late payment penalties are another consequence of not registering for VAT. These penalties are calculated at 5% of the tax due.
However, HMRC may waive late registration and payment penalties if there is a reasonable excuse, such as circumstances beyond one’s control or unexpected occurrences.
Businesses must be aware of these penalties and ensure timely registration to avoid incurring additional costs.
Voluntary VAT Registration: Pros and Cons
In some cases, businesses with a turnover below the VAT registration threshold may choose to register for VAT voluntarily.
This decision comes with its own set of advantages and disadvantages, which can significantly impact a business’s bottom line.
Let’s explore the pros and cons of voluntary VAT registration, and how they can affect your business’s financial situation.
Advantages of Voluntary VAT Registration
One of the main advantages of voluntary VAT registration is the ability to reclaim VAT on costs and charge customers VAT.
This can potentially increase a business’s profit margin, as they can claim back the VAT they have paid on goods and services used in the course of their business activity in other countries.
Additionally, being VAT registered can improve a business’s credibility and professionalism and may even allow the new business itself to claim VAT refunds.
Disadvantages of Voluntary VAT Registration
On the flip side, voluntary VAT registration comes with its own set of drawbacks. One of the primary disadvantages is that businesses now must register and remit VAT on their sales, regardless of whether or not they are profitable.
This can result in increased prices for customers, potentially leading to a decrease in competitiveness in the market.
Additionally, businesses may require the services of an accountant to prepare and submit VAT returns and manage VAT-related matters.
Reasonable Excuses for Not Registering for VAT
In some cases, HMRC may accept an appeal if there is a reasonable excuse for not registering for VAT on time.
While there is no legal definition of a reasonable excuse, specific circumstances that will be considered on a case-by-case basis.
To better understand what may constitute a reasonable excuse, let’s examine some examples.
Examples of Reasonable Excuses
Some examples of reasonable justifications for not registering for VAT include serious illness, bereavement, lack of funds to pay any VAT due, and service issues with HMRC online services.
However, it is important to note that deliberately evading VAT is a criminal offense, and businesses should always strive to comply with VAT registration requirements.
Managing VAT Returns and Payments
In order to stay compliant with VAT registration requirements, businesses must effectively manage their VAT returns and payments.
This involves maintaining comprehensive and up-to-date records of all suppliers online account, purchases, sales, and VAT calculations.
Additionally, there are specific deadlines for the payment of VAT liabilities, which must be adhered to in order to avoid penalties.
Submitting VAT Returns
Submitting VAT returns on time is essential to avoid penalties.
VAT returns must be submitted to HMRC no later than one month and seven days following the date of the conclusion date of the VAT period.
If a business is unable to pay their VAT bill on time, it is recommended to contact HMRC promptly to discuss possible solutions.
Even if payment is not possible at that time, the VAT return should still be submitted to avoid additional penalties.
Handling Late Submissions or Payment Difficulties
In cases where a business faces late submissions or payment difficulties, HMRC may waive the penalties applied for late submission or late payment if there is a reasonable excuse, such as circumstances beyond one’s control or unexpected occurrences.
Businesses in this situation may also be eligible to request a Time to Pay arrangement with HMRC, allowing them to pay back their debt in monthly instalments, usually over a period of up to 12 months.
Frequently Asked Questions
How much is the penalty for not registering for VAT?
Not registering for VAT can be a costly mistake, with a penalty of up to 100% of the amount of VAT due. This could be a considerable amount, and should not be ignored.
Is it a criminal Offence to not register for VAT?
It is a criminal offence to not register for VAT as it falls under the Value Added Tax Act 1994 and the Fraud Act 2006.
If an individual is found guilty of not registering, they could face a prison sentence and a substantial fine.
What happens if you don’t register for VAT in the UK?
Failing to register for VAT in the UK can be a costly mistake, with potential HMRC action if you are late by 18 months.
This penalty can include an additional payment of 15% and a Civil Evasion Tax Investigation if they suspect evasion.
It is therefore important to ensure you stay on top of your registration before the deadline.
Information For Company Directors
Here are some other informative articles for company directors in the UK:
- Bounce Back Loan Support
- Can A 50-50 Shareholder Put A Company Into Liquidation?
- Can I Be a Director Again After My Business Folds?
- Can I Be Investigated if My Company Goes into Liquidation?
- Can I Buy Back Assets During or After a Liquidation?
- Can I Reuse a Company Name After Liquidation?
- Company Owes Me Money and They Have Gone Into Liquidation
- Director Advice
- Director Dispute Over Liquidation
- How Can I Turnaround a Failing Business?
- Is a Director Liable if a Company Can’t Repay a Bounce Back Loan
- My Business Is Struggling with Energy Bills
- On What Grounds Can a Company Director Be Disqualified?
- What happens if I can’t pay a Bounce Back Loan or CBILS Loan
- What Happens If Your Company Can’t Break Even?
- What Happens to Employees When Going Into Liquidation?
- What Happens to My Pension in Liquidation?
- What Happens When a Company Goes into Administration?
- What is a Company Limited by Guarantee?
- What is a Winding Up Petition?
- What is Fraudulent Trading for a Limited Company
- What Is Limited Liability?
- What’s the Difference Between a Liquidator and the Official Receiver?
- Who Values the Assets in a Company Liquidation
Areas We Cover
- Register for VAT Greater London
- Register for VAT Essex
- Register for VAT Hertfordshire
- Register for VAT Kent
- Register for VAT Surrey
- Register for VAT Bedfordshire
- Register for VAT Buckinghamshire
- Register for VAT Berkshire
- Register for VAT Cambridgeshire
- Register for VAT East Sussex
- Register for VAT Hampshire
- Register for VAT West Sussex
- Register for VAT Suffolk
- Register for VAT Oxfordshire
- Register for VAT Northamptonshire
- Register for VAT Wiltshire
- Register for VAT Warwickshire
- Register for VAT Norfolk
- Register for VAT Leicestershire
- Register for VAT Dorset
- Register for VAT Gloucestershire
- Register for VAT West Midlands
- Register for VAT Somerset
- Register for VAT Worcestershire
- Register for VAT Nottinghamshire
- Register for VAT Bristol
- Register for VAT Derbyshire
- Register for VAT Lincolnshire
- Register for VAT Herefordshire
- Register for VAT Staffordshire
- Register for VAT Cardiff
- Register for VAT South Yorkshire
- Register for VAT Shropshire
- Register for VAT Greater Manchester
- Register for VAT Cheshire
- Register for VAT West Yorkshire
- Register for VAT Swansea
- Register for VAT North Yorkshire
- Register for VAT East Riding of Yorkshire
- Register for VAT Merseyside
- Register for VAT Devon
- Register for VAT Lancashire
- Register for VAT Durham
- Register for VAT Tyne and Wear
- Register for VAT Northumberland
- Register for VAT Cumbria
- Register for VAT Edinburgh
- Register for VAT Glasgow