Registering late for self-employment – Tax implications

Starting in self-employment can feel daunting. There may be a website to create, a business bank account to open, pricing to set and possibly premises to secure. In the midst of these priorities, many new sole traders overlook a key requirement – registering with HMRC. Failing to register on time can lead to penalties, including possible backdated obligations.

Is registration mandatory?

Registration becomes mandatory when gross income exceeds £1,000 in a tax year. Termed the ‘trading allowance’, the £1,000 is income before deduction of tax-allowable expenses. From a date to be announced (but by 2029), if gross trading income is between £1,000 and £3,000, a business will still need to register but instead of submitting a full self-assessment return, there will be a simplified online system. The trading allowance itself will remain at £1,000, but the change will affect who must file a full return. Voluntary registration is possible and may be relevant should a loss be incurred.

Registration time limit

The registration deadline is 5 October after the end of the tax year in which gross trading income exceeded £1,000. If late but any tax due is paid on time (by 31 January), HMRC has indicated that penalties may not apply provided certain conditions are met. These include having a reasonable excuse, the failure not being deliberate and notifying HMRC without unnecessary delay. Voluntary disclosure generally results in lower penalties.

However, if registration is late and tax unpaid or paid late, HMRC can levy a ‘failure to notify’ penalty. Penalties range from 0% to 30% of the potential lost revenue for non-deliberate failures but can be as much as 100% of the unpaid tax, for deliberate and concealed cases. The penalty may be reduced if individuals fully cooperate with HMRC or make an unprompted disclosure.

Making Tax Digital

Penalties for failure to notify and register for self-assessment will continue to be charged as detailed above. Failure to also sign up for MTD will incur late submission penalty points rather than failure to notify penalties.

An individual or business will be charged a penalty point every time a MTD quarterly or tax return deadline is missed. If four penalty points are received, HMRC will issue an automatic £200 charge.

Backdating self-assessment

Declaration is required from the date trading commenced; this may mean submitting returns backdated to cover all relevant years.

Penalties for late filing of returns are:

·         £100 fixed penalty for each late return (even if no tax owed)

·         After three months: £10 per day (maximum charge = £900)

·         After six months: additional £300 or 5% of outstanding tax (whichever is  greater)

·         After 12 months: further £300 or 5% of outstanding tax (whichever is greater)

Note that HMRC can charge both failure to notify and late filing penalties for the same situation as they are separate offences for different obligations.

If HMRC discovers non-compliance, then it can review up to 20 years outstanding returns if the behaviour is deemed as ‘deliberate’ and six years if ‘careless’, but the usual number of backdated years is four.

Late VAT registration

Separate rules apply to VAT registration. A business must register when its taxable turnover exceeds the £90,000 registration threshold. If the business fails to register on time, HMRC may backdate the registration to the date it should have occurred. The business will then be required to pay VAT on sales made since that date, even if not charged to customers at the time. In addition, late registration penalties may be levied based on the amount of VAT due and the length of the delay, with higher penalties for longer delays or deliberate non-compliance.

Practical point

In some cases, a business that temporarily exceeds the VAT threshold can apply for an exception from registration. To qualify, it must demonstrate that its taxable turnover will not exceed the £88,000 deregistration threshold within the following 12 months. However, HMRC is increasingly refusing exceptions, particularly where businesses have not adequately monitored turnover on an ongoing basis.

Partner note:

Compliance checks – penalties for failure to notify – CC/FS11

Sch 24 FA 2007

Sch 41 FA 2008

Sch 55 & 56 FA 2009

Sch 24 FA 2021

VAT Notice 700/41

Disclaimer

This article is not intended to be tax advice. Each person's tax circumstances are different; therefore, we recommend that you contact us for personalized tax advice. Sam Niranjan & Co., or Sivasambu Candesamy Niranjan, will not accept any responsibility whatsoever if you make any loss as a result of relying on this article.