If you are a sole-trader or a business with a turnover of more than £85,000, then you will need to register for VAT by law. If you don’t register or fail to understand how it works then this could mean that you face penalties.
It can seem quite confusing and complex given that the VAT is calculated on a 12-month rolling basis. However, it is vital that you monitor your earnings if you find yourself approaching the VAT threshold.
What Happens if You Forget to Register?
Before we cover what could happen should you fail to register for VAT, when should you consider registering for VAT?
If your sales are going to exceed £85,000 then you will need to register or if you believe that sales will pass the threshold next month, then it is time to register too.
If you forget to register for VAT, you will be hit with a charge in relation to failure to notify. The penalty will be determined by the amount of tax that you owe and this increases for every day that passes after you are due to register.
So, if you are late by 9 months or less, you will owe 5% of the amount as well as the tax that you should have paid. Anything between 9 months and 18 months, then the charge will increase to 10% for every payment you have missed. If you are late by 18 months then you will have to pay 15% of what you owe as well as the expected payment.
HMRC might decide to undertake a Civil Evasion Tax Investigation if they believe that you have deliberately attempted to evade tax. If HMRC does find that you have purposely evaded tax, then the penalty could equate to the same amount of tax that you owe.
What About a Late Payment?
If you fail to pay VAT on time then the penalty for this will be determined as a percentage of what you should have paid, which is currently set at 5%. You might have a reasonable excuse for not paying and in some instances, HMRC will waive the penalty.
Of course, the reasonable excuse has to be genuine and is considered to be out of your control or unexpected. This could include the likes of serious illness, bereavement or an issue with the online payment system.
If you are unsure about whether you need to register for VAT or if you are unsure how the system works, then it makes sense to seek assistance. There are severe penalties that you could face if you make a mistake or believe that you don’t need to register for VAT and you should ensure that you make payments on time. It is compulsory to register for VAT if your taxable turnover reaches the threshold of £85,000 in any 12-month period and that is why it is especially important to manage your turnover efficiently and correctly.