HMRC penalties for late VAT registration

VAT’S HOW TO DO IT (part 1)

Value Added Tax or VAT is always a thorny subject and affects all of us indirectly as it impacts on the prices we pay. It is particularly interesting for small business owners whose turnover is close to the VAT threshold.

The annual VAT registration limit is £83,000, so if the value of the goods or services that you sell exceeds this figure then you need to apply for VAT registration.

The first point to watch here is that the limit is for ANY 12 month period. It is not based on your accounts year-end date. So, if you wait until the end of your accounting period you may find that you are several months late in registering. There are 3 big problems here.

Firstly, the VAT man will say that you should have charged VAT on all sales from the date you exceeded the limit. So, if you exceeded the limit 6 months ago, and have invoiced £45,000 since then, you will owe HMRC £7,500. In some circumstances you might be able to recover this from customers, but often this is not possible.

Secondly, you will be charged a penalty based on the overall VAT payable.

Thirdly, even if your sales have since decreased below the VAT de-registration limit, once you were due to register, you remain registered until the date you notify the VAT man of this fact. So, you end up paying much more VAT than if you had dealt with the problem earlier.

So, it is vital to keep an up to date summary of your sales in the previous 12 months at all times. This allows for decisions to be made.

One decision could be to ensure that you trade below the VAT registration limit. A good example would be a coffee shop, where VAT registration would be disastrous if not managed properly. An increase in sales from £81,000 to £83,000 might end up in a VAT bill of around £12,000. So, a small increase in sales has actually cost you at least £10,000 in the pocket.

The answer might simply be to close on Monday afternoons, enjoy the time off and save yourself a lot of money! The key is having up to date figures to allow the right decision to be made.

Good financial management is one of the cornerstones of a successful business so don’t wait to attract HMRC penalties. Call Des on 0800 019 1744 or email dmm@barringtons.co.uk and we’ll make an appointment for you to discuss this in more detail.

Author: Andrew Wilshaw
Director at Barringtons Chartered Accountants