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You must not charge VAT if your business is not registered for VAT. However, VAT registered businesses must charge VAT on their taxable supplies of goods and services and can reclaim the VAT they have paid that relates to the supplies on which they have charged VAT.

A penalty is payable by anyone who issues an invoice showing VAT when they are not registered for VAT: paragraph 2, Schedule 41, Finance Act 2008. The penalty can be up to 100% of the VAT shown on the invoice. There is a minimum penalty of 10% of the VAT even if there is an unprompted disclosure to HMRC of a careless mistake, as distinct from deliberate and concealed conduct.

What Happens if I Charged VAT when not Registered?

Do not try and cover this up! HMRC are likely to take a very dim view of the position anyway without you making it worse by not reporting what has happened.

Putting Matters Right

To put matters right, you should do two things. First, you should issue a credit note and also a refund to the customer for the VAT involved and explain to them that they should correct their VAT account if they have claimed an input tax deduction for the VAT you have mistakenly charged them.

Second, and at the same time, you should make an unprompted disclosure to HMRC explaining what has happened and the action you are taking to correct the situation. You should also explain how the situation arose and hope that only the minimum 10% penalty is charged. Do keep in mind that HMRC has the power to recover the VAT wrongly charged as a debt due to the Crown: paragraph 5, Schedule 11, Value Added Tax Act 1994. Also, HMRC can charge interest until the VAT is paid over to HMRC: section 74(4) Value Added Tax Act 1994.

Registering for VAT

An alternative to the above would be to register for VAT retrospectively. You could then issue valid VAT invoices in place of the incorrect ones. This would avoid the need to issue a credit note but an explanation would still need to be given to the customers affected, and also to HMRC, who may still wish to charge a penalty. The amount of the VAT charged would need to be paid over to HMRC instead of your customers.

Conclusion

Do not adopt the old management technique of ‘do nothing and wait for the problem to go away’. Disclose the problem as soon as possible to customers affected and also HMRC and put matters right. If you require advice and assistance with this, contact Patrick Cannon today.

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