Most business owners in the trades think VAT is straightforward. Register, charge it, pay it. Job done. But what happens when you haven’t registered on time? That’s where things get very uncomfortable, very quickly.
So, let’s dive into this.
If your business has crossed the VAT threshold but you haven’t registered, or you’ve registered late, you need to read this carefully. Under the Value Added Tax Act (VATA) 1994 S77, HMRC has the power to issue a VAT assessment going back up to 20 years. I’ll say that again twenty years. That’s not a misprint. That’s a very long reach, and HMRC won’t hesitate to use it.
Now, here’s how the assessment works. HMRC will look at the VAT you should have been charging your customers that’s known as output tax and then they’ll look at the VAT you could have reclaimed on the materials and services you’ve purchased, known as input tax. The difference between those two figures is what becomes your VAT liability. Simple enough on the surface, but the real sting comes with the penalty on top of that.
Consider this: depending on how seriously HMRC views the situation. how much concealment was involved, how willing you’ve been to co-operate, and how much you’ve disclosed the penalty could sit anywhere between 20% and 100% of the VAT owed. For a deliberate failure to register, you’re firmly in the higher end of that range. We’re talking about a potentially business-ending sum of money.
Here’s where it gets worse for most trades businesses
One of the most common problems in late VAT registration cases is a lack of VAT invoices. Think about it. If you weren’t registered for VAT, you probably weren’t as diligent about collecting and keeping VAT invoices from your suppliers and merchants. And without those invoices, HMRC won’t allow the input tax deductions. No invoices, no deductions. The result? A significantly higher VAT assessment and, in turn, a significantly higher penalty.
This is why bookkeeping matters so much. It’s not just about ticking a box for compliance. It’s about protecting your business. Every invoice from your merchant, every receipt from a supplier. They all have a pound sign attached to them when things go wrong.
So what can you do if you’re already in this situation?
Let’s imagine you find yourself facing a late VAT registration enquiry and the invoices simply aren’t there to support your input tax claims. All is not necessarily lost. Subject to the conditions being met, you can ask HMRC to calculate the VAT assessment using the Flat Rate Scheme — or FRS, as it’s more commonly known.
Under VATA 1994 S73, HMRC is required to make any VAT assessment to the best of its judgement. The FRS, in the right circumstances, can actually produce a lower and more accurate assessment than the standard method — particularly where input tax evidence is thin on the ground. And a lower assessment naturally means a lower penalty.
It won’t be right for every situation, and I’d strongly urge you to take specialist advice before going down this road. But it’s a legitimate option, and one that many business owners simply aren’t aware of.
The real lesson here
Look, the vast majority of you reading this will never find yourself in a late VAT registration situation. But the principle holds whether you’re dealing with VAT, CIS, corporation tax, or any other financial obligation — the records you keep today are the foundation you stand on if HMRC ever comes knocking tomorrow.
Keep your invoices. Register on time. Work with an accountant who genuinely understands the plumbing and heating industry, because the advice you get or don’t get can make the difference between a business that thrives and one that buckles under the weight of an avoidable tax bill.
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