How to correct VAT errors

I have a question about VAT errors – I recently filed my own VAT return but I have realised I made an error on it and have underpaid VAT by £250. How do I correct this and are there penalties?

 

VAT errors

 

Answer, March 2018

We all make mistakes from time to time and underpaying £250 VAT due to an error on your last VAT return can be corrected quite easily by adding it on to your next VAT return.

Hopefully that will be the end of the matter, however HMRC take a dim view of “carelessness” let alone “deliberate inaccuracy”, so it’s worth taking a few steps to avoid or at least minimise any possible penalties.

It’s worth mentioning that not all underpayments count as errors. An example would be where you’d claimed back VAT on a purchase you made, and you subsequently returned the goods and were issued with a credit note. This is just an “adjustment” not an error.

Let’s look at the rules.

 

HMRC VAT error rules

 

VAT errors below £10,000

Rule 1 is that errors under £10,000 can be adjusted through your next VAT return, so your £250 error is covered by this rule.

If you had made several errors, some in HMRC’s favour and some in your favour, as long as the net error was under £10,000 you could still just correct the errors on your next return.

Errors over £10,000 but less than £50,000 can still be corrected on your next return as long as the net error is less than 1% of the Box 6 figure (net value of sales). Otherwise, and anyway if the net error is over £50,000, the errors must be notified in writing to HMRC.

 

VAT errors 4 year rule

Rule 2 is that the error must be corrected within 4 years of the end of the VAT period in which the error occurred. As you say you’ve only recently filed your VAT return, we can assume you are also covered by this rule.

So, how do you correct the error on your next return?

This depends on whether your error relates to sales or purchases.

If you missed off a sales invoice or receipt, just include it in your Box 1 (VAT on outputs) and Box 6 (net sales) amount in the usual way.

If you claimed VAT back on an expense, and subsequently realised you shouldn’t have (e.g. because it was for Entertainment), deduct the VAT you claimed previously from your total for Box 4 (VAT reclaimed on purchases) and add it on to your Box 7 (net purchases) figure.

 

Accounting for VAT errors

This brings us on to Rule 3 which is that you must update your “VAT account” in your book-keeping system to show the date you discovered the error, how it occurred and how you corrected it.

This is necessary, anyway, for your VAT account to “reconcile” for your year-end accounts.

 

Reporting VAT errors to HMRC

Rule 4 is to report the error to HMRC in writing. This can be done using their own form: VAT652.

Although the value of the error is less than the reporting threshold, we would recommend that it is notified to HMRC as this reduces any chance of a penalty being applied. If you use the VAT 652 form to do this, then you must ensure that the box is ticked to show ‘Adjusted in VAT Return’ – otherwise you will receive a demand to pay the VAT error again!

HMRC can impose a penalty of up to 100% of the VAT you’ve underpaid if the error was made deliberately. So, in your case, you could be fined a maximum of £250. The level of a careless penalty is reduced or waived completely if you not only spot and correct the error before they notice it, but also voluntarily make them aware of it.

 

You may want to check out another article we have about VAT late filing and late payment penalties.