charging vat when not registered

When your business isn’t registered for VAT, you must not charge VAT. The taxable supplies of goods and services that VAT-registered businesses make must be subject to taxation, but they can reclaim the VAT that they have paid on those supplies.

If an invoice shows VAT when the invoice user is not registered for VAT, there is a penalty to pay: paragraph 2, Schedule 41, Finance Act 2008. Depending on how much VAT is shown on the invoice, the penalty could be as high as 100%. Even if a careless mistake is disclosed to HMRC unprompted, as opposed to deliberate and concealed conduct, there is a penalty of 10% of the VAT.

The penalty may be reduced if you voluntarily disclose the issue to HMRC before they become aware of it, that is, an unprompted disclosure. There is specific wording in the legislation to allow for this reduction.

It may also be reduced under HMRC’s general voluntary disclosure policy if you come forward before they find out about your mistake and can show that you are a small business and took reasonable care in accounting for VAT. If, however, they consider it to have been deliberate and concealed conduct then there will be no reduction.

The penalty will not apply in either of the above cases if there has been no significant economic advantage or loss to the UK Exchequer from the error.

Please see the VAT Notice 703, and the VAT Notice 704 for advice on what constitutes ‘significant economic advantage or loss’.

It is also important to note that all correspondence and investigations under the provisions above are entirely voluntary. HMRC will not press criminal charges against you for any fraudulent actions. If you voluntarily disclose the issue to HMRC before they find out about it, there will be no penalty. However if they consider it to have been deliberate and concealed conduct then there will be no reduction of the penalty..

If you have any inquiries please contact our office.

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