If you have realised you crossed the £90,000 threshold and should have registered for VAT months ago, the useful thing to know is that you are facing two separate bills, and they behave very differently.
The first is the VAT itself, on sales you have already made. That one is largely fixed. The second is a penalty, and that one is still very much in your hands. It can be reduced to nothing, but only if you move before HMRC does.
The two bills
Bill one: the VAT you should have charged. Registering late means your registration is backdated to the date you should have registered, and from that effective date onwards you owe VAT on your sales whether or not you charged it. You can ask customers for it after the fact, and VAT registered customers will usually pay. Consumers and non-registered businesses will usually decline, and then it comes out of your margin. There is more on how that works, and how the date is set, in our guide to going over the VAT threshold without realising.
Bill two: the penalty for not telling HMRC. This is what the rest of this article is about. It is a percentage, it is driven mostly by your behaviour rather than the size of the debt, and the single biggest lever on it is whether you volunteer the problem or wait to be found.
It is worth saying that this is a different animal from a late Companies House filing, where the penalty is automatic and fixed by a published scale. Here, what you do next genuinely changes the number.
The penalty is called failure to notify
Registering late is not treated as a late filing. It is treated as a failure to notify HMRC that you became liable to register, and it carries its own penalty regime.
The penalty is a percentage of the potential lost revenue. In plain terms that is the VAT you should have paid over for the period you were unregistered but should not have been. So the penalty scales with how much VAT you missed and how long you were late, but the percentage is set by two things: how HMRC characterises your behaviour, and who raised it first.
The bands
These are the published ranges, from HMRC's failure to notify penalties guidance. Read the two right hand columns against each other, because that gap is the whole point of this article.
| How HMRC sees it | You come forward | HMRC comes to you |
|---|---|---|
| Not deliberate, within 12 months of the tax being due | 0% to 30% | 10% to 30% |
| Not deliberate, more than 12 months | 10% to 30% | 20% to 30% |
| Deliberate, not concealed | 20% to 70% | 35% to 70% |
| Deliberate and concealed | 30% to 100% | 50% to 100% |
Most people reading this are on the top row. Missing a rolling twelve month threshold while you were busy running a business is the definition of not deliberate, and it is by far the most common way this happens.
Why coming forward is worth so much
Look at the top row again. If your failure was not deliberate and you tell HMRC within twelve months of the tax becoming due, the penalty range starts at nought per cent. If HMRC gets there first, the same failure, the same money, the same person, starts at ten.
That is the entire argument for acting this week rather than hoping. Nothing about your situation changes in the meantime except who speaks first, and that single fact is worth the difference between a penalty of nothing and a penalty of thousands.
It gets worse the longer you sit on it, because the twelve month clock is also running. Once you are more than twelve months past the point the tax was due, the floor for a voluntary disclosure rises from nought to ten per cent, and you have lost the best outcome permanently.
An unprompted disclosure means you told HMRC before you had any reason to believe they were about to find out. Once a compliance check letter lands, it is prompted, and the better rates are gone.
Reasonable excuse
There is one more route to no penalty at all. If your failure to notify was not deliberate and you have a reasonable excuse, HMRC will not charge a penalty.
A reasonable excuse is something that stopped you meeting an obligation you were otherwise taking reasonable care to meet. It is judged on your particular circumstances, so what works for one business will not automatically work for another. Serious illness at the critical moment, or something genuinely outside your control, is the shape of it.
What it is not is simply not having realised. That is the ordinary case, and the ordinary case is what the not deliberate band already covers. It is worth raising if you have real circumstances, but it is not a substitute for coming forward early.
What brings the bill down
Before you assume the worst, there is VAT running the other way that people routinely forget to claim. When you register, you can reclaim input VAT on things you bought before registration, within limits:
- Goods: up to 4 years before your effective date of registration, provided you still have them, or they went into something you still have, and they are for the business.
- Services: up to 6 months before your effective date of registration.
If you have been trading unregistered for a while, and particularly if you bought equipment or stock in that period, this can take a meaningful bite out of the net position. It does not touch the penalty, but it reduces the VAT bill the penalty is calculated against, which helps twice.
Worth being straight about the limits: the four year rule needs the goods still on hand, so consumables you have already sold or used up do not qualify, and six months on services is short. It will rarely wipe the bill out. It is still money most people leave behind.
What to do this week
- Work out the real effective date your registration will be backdated to, using the backward and forward look tests. Everything else is calculated from it, and getting it wrong in either direction is expensive. Our VAT threshold calculator is a quick way to see where you stand.
- Work out the VAT due from that date, treating the VAT as inside the prices you already charged rather than on top of them.
- Pull together the pre-registration input VAT you can reclaim, using the 4 year and 6 month rules above.
- Check where you are against the twelve month line. If you are close to it, that is the difference between a floor of nought and a floor of ten per cent.
- Register and make the disclosure. Do it before anything from HMRC arrives, because the day a compliance check letter lands, the cheaper half of that table is gone.
If you are not sure how late you actually are, or how bad the number is, send us your turnover figures for the last couple of years and we will work out the effective date, what is owed, what you can reclaim against it, and which row of that table you are on. If it turns out you were never required to register, we will tell you that too.
The one thing not worth doing is waiting to see whether anyone notices. That is the only approach that reliably makes it more expensive.
Frequently Asked Questions
It is a failure to notify penalty, charged as a percentage of the VAT you should have paid while unregistered. For a non-deliberate failure the range is 0% to 30% if you come forward within 12 months of the tax being due, and 10% to 30% if HMRC approaches you first. Deliberate behaviour carries much higher rates.
Yes. If the failure was not deliberate and you make an unprompted disclosure within 12 months of the tax becoming due, the range starts at 0%. A reasonable excuse for a non-deliberate failure also means no penalty is charged.
An unprompted disclosure is one you make before you have reason to believe HMRC is about to discover the problem. Once HMRC contacts you, it is prompted and the minimum penalty rises. For a non-deliberate failure within 12 months, that is the difference between a floor of 0% and a floor of 10%.
Yes. From your effective date of registration you owe VAT on your sales whether or not you charged it. You can ask customers for it afterwards, but consumers and non-VAT-registered businesses usually decline, so it often comes out of your margin.
Yes, within limits. Goods bought up to 4 years before your effective date of registration can be reclaimed if you still have them or they went into something you still have. Services are limited to 6 months before registration. Everything must be for business purposes.
Something that stopped you meeting an obligation you were otherwise taking reasonable care to meet, judged on your particular circumstances. It generally means events outside your control. Simply not having realised you had crossed the threshold is the ordinary case rather than a reasonable excuse.