1.5 Late Registration, HMRC Assessments & Failure-to-Notify Penalties

1.5 Late Registration, HMRC Assessments & Failure-to-Notify Penalties

Section 1.2 dealt with when a business becomes liable to register. This section deals with what happens when it does not. The AAT scope of content is explicit here: you must understand HMRC's powers to penalise a business that has failed to register, the detail of the penalty regime for non-registration or late registration, HMRC's powers of assessment where returns are not submitted, and the operational and legal consequences of incorrect recovery of VAT.

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1. The Cost of Registering Late

Registration is backdated to the effective date of registration (EDR) that the tests in section 1.2 produce, not to the date HMRC processes the application. From the EDR onwards the business was a taxable person, so it:

1. Owes output tax on every taxable supply it made from the EDR, and
2. Can recover input tax on its purchases from the EDR (plus the pre-registration input tax described in section 2.2).

The first of those is the painful one. The business did not charge VAT at the time, so HMRC treats the amounts it received as VAT-inclusive. On £120,000 of standard-rated sales made while unregistered, output tax is £120,000 × 1/6 = £20,000, not £24,000 — but it comes straight out of margin.

The business may ask its customers to pay the VAT by issuing VAT-only invoices. A VAT-registered customer will usually agree, because it can recover the tax. A consumer or an exempt business almost never will, and the supplier absorbs the whole amount.

Worked illustration: Halberd Fitting Ltd should have registered from 1 March 2026 but only notified HMRC in November 2026. Between 1 March and 31 October it made £150,000 of standard-rated sales to the public and incurred £3,400 of recoverable input tax.

• Output tax: £150,000 × 1/6 = £25,000
• Input tax recoverable: £3,400
• Net VAT payable to HMRC: £21,600, plus late payment interest, plus any failure-to-notify penalty.

None of the £25,000 can be passed to the retail customers, so it is a straight hit to profit.

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2. The Failure-to-Notify Penalty Regime

Late registration is not dealt with by a flat fine. It sits inside the general failure-to-notify penalty regime, and the penalty is a percentage of the potential lost revenue (PLR) — broadly the VAT that went unpaid because HMRC was not told.

The percentage depends on two things: behaviour, and whether the disclosure was prompted or unprompted. A disclosure is unprompted if the business tells HMRC before it has any reason to believe HMRC is about to discover the failure; otherwise it is prompted.

Where the business lands inside the range

HMRC reduces the penalty from the maximum towards the minimum according to the quality of the disclosure, assessed under three headings:

• Telling — admitting the failure and explaining how and why it happened.
• Helping — quantifying the under-declaration, giving HMRC the workings.
• Giving access — providing records and answering questions promptly.

A business that comes forward voluntarily, within 12 months, with a full calculation and open books, can reduce a non-deliberate penalty to nil. The same business that waits for the compliance-check letter cannot go below 10%, and if it waits more than 12 months it cannot go below 20%.

Reasonable excuse

No penalty is charged where the business has a reasonable excuse for the failure, provided it was not deliberate and the business puts things right without unreasonable delay once the excuse ends. Serious illness or an unforeseeable event can qualify. Simply not having the money, not understanding the rules, or relying on an adviser without checking, generally does not.

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3. HMRC Powers of Assessment for Missing Returns

A separate power applies when a registered business simply does not file. If a VAT return is not submitted, HMRC may issue a central assessment — an estimate of the VAT due, based on the business's previous returns and any other information HMRC holds.

Three consequences follow:

1. The assessment is legally enforceable as if it were the business's own declaration. It becomes payable, and late payment penalties and interest run from the ordinary due date.
2. A central assessment is usually low. HMRC's estimate is often less than the true liability. That is not a windfall.
3. The business must tell HMRC if the assessment understates the tax. Failing to notify an under-assessment within 30 days is itself a penalisable inaccuracy, and paying the low assessment quietly is treated as accepting it dishonestly.

Submitting the actual return displaces the assessment. It does not remove the penalty point for the late submission, or the interest already accrued.

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4. Consequences of Incorrect Recovery of VAT

The scope of content also asks for the operational and legal consequences of recovering VAT incorrectly — claiming input tax the business was never entitled to.

The most frequent causes are mundane rather than fraudulent: input tax claimed on UK client entertaining, on the purchase of a car with private use, on the full lease rental of a car rather than 50%, on exempt-attributable costs by a partly exempt business, or on invoices addressed to a director personally rather than to the company.

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5. Putting It Together

Scenario: Cadence Interiors Ltd crossed the £90,000 historic threshold at 31 January 2026 but did not notify HMRC. In April 2027 the company's new accountant spots the breach and writes to HMRC immediately, quantifying £14,000 of net VAT for the period from the EDR of 1 March 2026 and providing all workings.

Analysis:

• EDR: 1 March 2026 (first day of the second month after the January breach).
• Behaviour: non-deliberate — an oversight, not a scheme.
• Disclosure: unprompted, but made more than 12 months after the tax first became due.
• Penalty range: 10% to 30% of the £14,000 potential lost revenue, so £1,400 to £4,200.
• Mitigation: because the disclosure told HMRC everything, quantified the liability and gave full access, the penalty should sit at or close to the 10% minimum.
• Also payable: the £14,000 of VAT itself, plus late payment interest from each period's due date.

Had the accountant found this in November 2026 instead — still within 12 months — the minimum would have been 0%, and a full and helpful disclosure could have eliminated the penalty entirely. Timing is worth real money.