A guide to correcting VAT errors

Updated on May 13, 2022

When submitting a VAT return, mistakes might happen, especially if your business is small and still developing. If your supplier issued you an invoice with the wrong amount of VAT on it, and you paid it, expecting the supplier to get it right, you may be liable for the error.

HMRC, on the other hand, sees it as your obligation to fix any VAT mistakes you may have made. The Penalties for Errors regime is a mechanism by which HMRC can impose penalties if you don’t repair the VAT error in the appropriate way or at the right time.

For the most part, it’s easy to report and remedy VAT problems. This quick tutorial will walk you through the procedure. However, if the error is significant or does not meet HMRC’s standards, you should seek the assistance of an accountant.

Identifying the error 

Every three months, a VAT-registered business must submit its VAT returns.

As you can see in your VAT online account,

moment you have to file your VAT return

in order for it to clear the account of HM Revenue & Customs

The online submission and payment deadlines are one month and seven days after the conclusion of your quarterly accounting period. Allow enough time for the money to arrive at HMRC’s bank account.

It is critical that the figures you include in your return reflect the correct rate of VAT and that you have collected and paid the correct amount of VAT.

In the event that a mistake is discovered after submitting a return, it is imperative that you correct it as soon as possible to avoid a potential fine and penalties.

In your most recent submission, you may not have made the same error. All of your prior submissions rely on the veracity of the data you provide.

A larger penalty may be assessed if HMRC conducts a VAT examination and discovers an inaccuracy you missed. It’s a good idea to double-check your tax returns before sending them in.

VAT

Correcting VAT errors within thresholds 

To keep things easy, you may be able to fix the mistake on your next VAT return without informing HMRC if the following conditions are met:

HMRC’s reporting threshold has been met.

This was not a mistake on the part of the author.

Accounts for less than four years were affected by the inaccuracy.

Reporting thresholds 

Your next tax return can be adjusted if the total amount of your errors is less than £10,000 in value.

You can also make the adjustment on your next tax return if the total value is between £10,000 and £50,000. However, the total value of the error must not exceed 1% of the total value of your sales and other outputs indicated in box 6 of your next return.

You must notify HMRC if the error’s value is more than specified criteria.

Adjusting the return 

Box 1 of your return should reflect the net amount you owe as a result of the error.

Box 4 of your return should reflect any VAT you are due as a result of the error.

Remember to keep a log of all the steps you took to correct the problem and what went wrong. Your VAT records should also be updated to reflect the right numbers.

Related: Understanding VAT on Delivery Charges in the UK

 

Related: VAT on business entertainment explained

Reporting errors outside thresholds

If the inaccuracy exceeds the thresholds, if it is willful, or if it is older than four years, you must disclose it to HMRC.

HMRC’s VAT Error Correction Team can be contacted by form VAT652 or letter.

You should be aware that if HMRC determines that the error was caused by careless or purposeful behaviour, you may be subject to interest or penalties.

In order to get in touch with HMRC, the following information may be required:

How and why the error was made is a question that needs answering.

Errors happened within a specific accounting period

The input or output error type

There may be an error with your VAT liability or refund for this accounting period.

For the correction, your calculations are correct.

Amount to be recalculated in VAT

HMRC’s Penalties for Errors regime 

Penalties will be applied to careless or purposeful errors or inaccuracies relating to return periods commencing on or after April 1, 2008, when the due date for the return is on or after April 1, 2009.

HMRC expects you to take action if you detect a non-careless error. If you don’t do something about the error, it will be viewed as reckless, and you will be subject to a punishment.

The new penalty regime will apply to errors that were made intentionally or carelessly in returns filed on or after April 1, 2008, with a due date of April 1, 2009, or later.

In some cases, HMRC discovers errors during an inspection, while in other cases, the problem is brought to HMRC’s attention by you.

Penalty rates 

Depending on the nature or severity of the fault, HMRC can levy a variety of penalties:

Error penalties range from 0% to 30% of the error’s value.

Deliberate errors can result in fines of up to 70 percent of the error’s value.

Penalties for purposeful and disguised errors can be as high as 100% of the error’s value.

Reductions in penalties

Regardless of the amount or value of the mistake, you must notify HMRC of it in order for them to consider a reduction in the penalty.

The fines for prompting errors are larger than those for unprompted errors, so if you see an error, notify HMRC immediately.

It’s still possible to write to HMRC and apply for a penalty reduction if your return has been corrected for a thoughtless error or inaccuracy that falls within the criteria. No penalty will be imposed because the vast majority of errors will not be careless or deliberate.

Support from Accounts and Legal

This is a quick rundown of the procedures for disclosing and fixing mistakes in a VAT submission. When it comes to HMRC’s VAT regulations, our tax professionals are here to help.

Please call us at 0207 043 4000 or email us at [email protected] for additional information. Click here for a free, no-obligation accountancy estimate.