Importance of VAT Registration

We have many clients who see VAT registration as the ‘end of their business’. But we find many clients totally unaware of the penalties and other fines that can be imposed by HMRC if they do not comply with the regulations.
The following details are of a recent case involving non-registration for VAT.

The case of Ahmed Rasouli (t/a Euro Foods) v HMRC (TC05910)
The case was ostensibly about whether the taxpayer registered for VAT on the correct date. The starting point of any VAT registration challenge is to determine the date when a business is obliged to register, i.e. when the compulsory registration threshold has been exceeded.

Euro Foods traded as a convenience store selling food, household products, alcohol and tobacco. Rasouli took over the business of Euro Foods on 1 April 2012, according to HMRC. As he took over the business as a going concern (although this was disputed by Rasouli), he was obliged to register from his first day of trading, because the previous owner of the business was trading above the VAT threshold. This is a key factor in the transfer of a going concern rules; the buyer must treat the seller’s taxable sales as part of his own turnover (VAT Notice 700/1, para 3.8).

The first dispute was whether Rasouli actually took over the business on 1 April 2012. The tribunal disagreed with HMRC’s conclusion and decided that 12 October 2012 was the relevant date because this was when the lease of the shop and flat was transferred to Rasouli from the previous owner.
The taxpayer had been advised by his accountant in 2012 that he should have registered for VAT, but he ignored this advice. This led HMRC to believe the taxpayer knew what he was doing when he missed the VAT registration date, so they treated the late registration as a “deliberate error not concealed”, and issued a penalty for £4,989.

Key Feature of a late VAT Registration
The level of penalty is determined by the behaviour of the taxpayer that caused the late registration, which is categorised into:
• non-deliberate (0-30%)
• deliberate (20-70%)
• deliberate and concealed (30-100%)

This percentage is multiplied by the tax unpaid for the late period (the potential lost revenue: PLN) to establish the penalty – see leaflet CC/FS 11.
To make it worse for Rasouli, the VAT registration was “prompted” by HMRC visiting the taxpayer. The penalty for a prompted disclosure of a deliberate error is 35% to 70%. Where the taxpayer comes forward and registers for VAT of his own accord the penalty would be 20% to 70%.

The Bean Counter’s advice is that if you know you are in breach, then register immediately, inform your Accountant and ask them to write to HMRC to help mitigate your reasons for non-registration. Don’t let HMRC discover that you should have been registered!

It is important clients are aware that late VAT registrations can be corrected by HMRC going back 20 years – a power they will be prepared to use if appropriate!

Please contact us if you require more information on VAT registration.  The high and very discretionary penalties mean that non registration is just not worth the risk! So keep a close eye on your turnover if you are getting close to the VAT registration level.

The Turnover level for VAT registration in 2017/18 is £85,000.

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