VAT errors are often the result of simple mistakes – from miscalculations and input errors to misapplied rates or confusion over complex rules. Sometimes, oversights stem from regulatory changes or a lack of VAT knowledge.
Whatever the reason, promptly notifying HM Revenue & Customs (HMRC) of any VAT return errors is essential. Failing to correct a VAT error doesn’t just leave it unresolved – HMRC may view it as careless, which could lead to penalties and late payment interest.
Until recently, the VAT652 form was the standard method for reporting such errors. However, HMRC has now withdrawn the form, changing how businesses must disclose inaccuracies in their VAT returns.
Reporting VAT errors: what has changed?
VAT corrections to returns than have already been submitted can no longer be made using form VAT652. Going forward, errors on previous VAT returns should be reported to HMRC by either:
- Updating the next VAT return;
- Making the correct online; or
- Sending the correction in writing
Corrections must be made within four years from the
- End of the prescribed accounting period in which the error occurred for under-declared and over-declared output tax and over-claimed input tax
- Due date of the return for the prescribed accounting period in which the error occurred for under claimed input tax
The four-year time limit does not apply to deliberate errors.
Correcting errors
While HMRC promotes adjusting errors in the next VAT return as the simplest and most common method, it is not always appropriate or permitted.
Adjusting the next VAT return is a feasible option if the error was made despite taking reasonable care and:
- The net value of the error does not exceed £10,000; or
- Is between £10,000 and £50,000 but does not exceed 1% of the box 6 (net outputs).
Errors must be separately notified to HMRC either online or in writing if:
- The net value of errors found on previous returns is greater than £50,000; or
- Is between £10,000 and £50,000 and exceeds 1% of the box 6 (net outputs).
Even if an error was not careless, it must still be corrected following the proper steps – failure to do so may lead HMRC to classify it as careless, with potential penalties to follow.
Guidance for penalties and errors
To avoid penalties, businesses should keep detailed records of any VAT errors, including how the error occurred, the relevant VAT period, whether it relates to input or output tax, and the amount involved.
HMRC may impose penalties, starting at 10% of the unpaid VAT, if an error is considered careless or deliberate. However, no penalty will apply if the error was made despite taking reasonable care.
Penalties can be reduced based on the behaviour of a taxpayer, and whether or not the disclosure is regarded as “prompted or unprompted”. To reduce or avoid penalties, full disclosure is essential – especially for deliberate errors, which must always be reported in writing.
Amending errors through your next VAT return does not count as a formal “disclosure” for penalty purposes.
This means that if the error was due to “careless” behaviour, simply correcting it via the VAT return may not be enough to secure the maximum reduction in any penalty charged. To benefit from the full reduction, HMRC requires a separate written disclosure – either by letter or by submitting an error correction notification – that clearly sets out:
- The nature of the error; and
- Your reasons for requesting a reduced penalty.
How M+A Partners can help
VAT is a complex area that requires careful planning. We are experienced in all aspects of VAT and can assist with any stage of the returns process.
If you need advice or support on the changes to reporting errors in previous VAT returns, get in touch with our specialist below.
