If a business that is not VAT registered issues an invoice showing VAT, or an invoice that includes an amount for VAT, HMRC can charge a wrongdoing penalty under paragraph 2 of Schedule 41 to the Finance Act 2008. The penalty is a percentage of the VAT shown: up to 30% if the act was not deliberate, 70% if deliberate and 100% if deliberate and concealed, reduced for disclosure. Separately, HMRC can recover the full amount shown as VAT from the business that issued the invoice.
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What counts as charging VAT when you are not registered?
Paragraph 2 of Schedule 41 makes a penalty payable where an “unauthorised person” issues an invoice showing an amount as VAT or as including an amount attributable to VAT. An unauthorised person is anyone other than a person registered for VAT, a member of a VAT group, a person treated as a taxable person under section 46(4) of the VAT Act 1994 (such as an insolvency practitioner), a person authorised under the rules on sales in satisfaction of a debt, or a person acting for the Crown.
HMRC’s Compliance Handbook at CH91350 stresses that the invoice does not have to be a valid VAT invoice. It simply has to show VAT or include an amount attributable to VAT. HMRC lists the usual cases as a business that:
- is below the VAT registration threshold but adds VAT to its invoices;
- keeps charging VAT after it has deregistered;
- charges VAT before the date it becomes liable to be registered;
- is a farmer not certified under the agricultural flat rate scheme but issues flat rate scheme invoices.
HMRC’s own example is a garage owner, Mark, who trades below the threshold but includes VAT on his customer invoices. He is an unauthorised person and is liable to a penalty for each invoice.
How is this different from registering late?
A business whose turnover passes the threshold and which fails to register is dealt with differently. CH91350 says such traders should be considered for a failure to notify penalty instead; see what happens if you register for VAT late. The wrongdoing penalty is aimed at the act of showing VAT on an invoice when you have no right to do so.
A common trap arises while a registration application is being processed. GOV.UK guidance on registering says you cannot include VAT on your invoices until you get your VAT registration number, but you can increase your prices to account for the VAT you will owe. Once the number arrives, you reissue the invoices showing VAT, and the customer can then reclaim it.
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Does HMRC also collect the VAT shown on the invoice?
Yes. Under paragraph 5(2) of Schedule 11 to the VAT Act 1994, where an invoice shows a supply with VAT chargeable on it, an amount equal to the VAT shown can be recovered from the person who issued the invoice. If VAT is not shown separately, the part of the total that represents VAT is recoverable. Paragraph 5(3) says this applies whether or not the invoice is a proper VAT invoice, whether or not VAT was actually chargeable, and whether or not the issuer is a taxable person. So the business loses the money it collected as “VAT” and also faces the penalty on top.
How is the penalty calculated?
The starting point is the “potential lost revenue”. For this wrongdoing, paragraph 8 of Schedule 41 sets it as the amount shown on the invoice as VAT, or the amount taken as representing VAT. The penalty is then a percentage of that figure under paragraph 6B, depending on behaviour:
| Behaviour | Maximum penalty | Minimum, unprompted disclosure | Minimum, prompted disclosure |
|---|---|---|---|
| Not deliberate | 30% | 10% | 20% |
| Deliberate but not concealed | 70% | 20% | 35% |
| Deliberate and concealed | 100% | 30% | 50% |
Paragraph 5(2) treats the act as deliberate and concealed if it is done deliberately and the person makes arrangements to conceal it. HMRC’s example at CH93150 is Anita, an unregistered alterations business, who puts a false VAT number on an invoice to win a theatre contract and then replaces her own copy with one showing no VAT.
Two features make this penalty harsher than an inaccuracy penalty on a return. First, CH93300 confirms there is no “reasonable care” category, so an honest mistake still falls in the 30% band unless there is a reasonable excuse. Second, CH91300 says an unregistered person is liable to a separate penalty for each invoice, with the invoice date as the penalty period.
How can the penalty be reduced?
Paragraph 13 requires HMRC to reduce the percentage to reflect the quality of any disclosure, but not below the minimums in the table. Under paragraph 12, disclosure means telling HMRC about the wrongdoing, giving reasonable help in quantifying the tax, and allowing access to records. CH94850 suggests weighting these 30% for telling, 40% for helping and 30% for giving access. Quality includes timing, nature and extent, and CH95000 says that a delay of more than about 3 years in coming forward will normally limit the reduction for telling.
A disclosure is unprompted if it is made when the person has no reason to believe HMRC has discovered or is about to discover the wrongdoing; otherwise it is prompted. Unlike the failure to notify penalty, which can fall to 0% in some cases, the lowest possible wrongdoing penalty for a non deliberate act is 10%. See prompted and unprompted disclosure for how HMRC draws the line.
Other routes to a lower bill are narrow:
- Reasonable excuse. Paragraph 20 removes liability for a non deliberate act where there is a reasonable excuse. Lack of funds is not an excuse unless caused by events outside your control, and relying on someone else is not an excuse unless you took reasonable care.
- Agents. Paragraph 21(2) treats an invoice issued by someone acting on your behalf as yours, but you are not liable if you took reasonable care to prevent it.
- Special reduction. Paragraph 14 lets HMRC reduce a penalty in special circumstances, which never include inability to pay; see special reduction of penalties.
What does this look like in numbers?
Illustration only. A sole trader below the threshold adds 20% to her invoices for six months, showing £2,400 in total as VAT. She realises the mistake and tells HMRC before any contact, helps quantify the figures and provides her records.
| Outcome | Amount |
|---|---|
| VAT shown, recoverable under Schedule 11 paragraph 5(2) | £2,400 |
| Penalty, not deliberate, unprompted, full disclosure credit (10%) | £240 |
| Same penalty if HMRC had found it first (20%) | £480 |
| Penalty if deliberate, prompted, full credit (35%) | £840 |
Her customers, if VAT registered, should not reclaim the £2,400. VAT Notice 700 at paragraph 19.5.1 says only a VAT registered person can issue a VAT invoice, and that knowingly using an invoice from an unregistered person to reclaim VAT is an offence.
How is the penalty assessed and can it be appealed?
Under paragraph 16, HMRC must assess the penalty, notify you and state the period it covers; the penalty is payable within 30 days of the notice. The assessment must be made within 12 months of the end of the appeal period for the related demand for the VAT, or, if there is none, of the date the amount is ascertained. Paragraph 17 lets you appeal both whether a penalty is due and its amount, and paragraph 18 treats the appeal like an appeal against an assessment, including HMRC review and the tribunal. You do not have to pay the penalty before the appeal is decided. See statutory review and the tax tribunal.
What mistakes lead to this penalty?
- Adding VAT “to look established” or because a customer asked for a VAT invoice.
- Leaving VAT on invoice templates after deregistering.
- Showing VAT while waiting for a registration number, instead of raising prices and reissuing invoices later.
- Assuming that if the invoice is not a proper VAT invoice there is no problem. Any invoice showing or including VAT counts.
- Waiting for HMRC to find it. The minimum penalty doubles from 10% to 20% once a disclosure is prompted.
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Related Accountapedia entries
- VAT on electric vehicle charging
- Tax Investigation Insurance for VAT Registered Businesses
- Can I charge VAT after registering late
- Charging interest on a loan to your company
- Registered office address rules
Sources
- legislation.gov.uk: Act 2008 c. 9, schedule 41
- GOV.UK: Manual page CH91350
- GOV.UK: Manual page CH91300
- GOV.UK: How register for vat
- legislation.gov.uk: Act 1994 c. 23, schedule 11
- legislation.gov.uk: Act 2008 c. 9, schedule 41
- legislation.gov.uk: Act 2008 c. 9, schedule 41
- legislation.gov.uk: Act 2008 c. 9, schedule 41
- legislation.gov.uk: Act 2008 c. 9, schedule 41
- GOV.UK: Manual page CH94800
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.