This is a guide to correcting VAT errors and mistakes. 

Subscribers see Correcting VAT errors

This is a freeview 'At a glance' guide.

At a glance

There are two methods for correcting VAT errors:

  • Method 1: for errors of a net value that do not exceed £10,000, or errors of a net value between £10,000 and £50,000 that do not exceed the limit described below.
  • Method 2: for errors of a net value between £10,000 and £50,000 that exceed the limit below or for net errors greater than £50,000, or if you so choose, for errors of any size

For HMRC guidance on correcting errors see VAT Notice 700/45.

It is important to correct errors as soon as possible after they are spotted in order to avoid a penalty for error or mistake.

Method 1 requires small errors to be adjusted within the VAT records and software adjusted. When you submit your next return, add the net value to box 1 for tax due to HMRC, or to box 4 for tax due to you.

Where a business makes an error correction using Method 2, they are not required to amend the input tax claimed or output tax charged recorded in the digital record of the supply. Instead, HMRC is notified using form VAT 652.

Under Making VAT Digital, a method 2 error means that no adjustment is required to be made to functional compatible software.

Accounting adjustments are not errors, they include:

  • Retail scheme annual adjustments, or other adjustments required when a person stops using a particular retail scheme.
  • Adjustments under the Capital Goods Scheme.
  • An approved estimation procedure.
  • Partial exemption adjustments.
  • Partial exemption clawback and payback adjustments.
  • Exports and intra-European Community supplies of goods.
  • Issuing or receiving credit and debit notes.
  • claims for bad debt relief.
  • Pre-registration and post deregistration expenses.
  • Adjustments for valid prompt payment discounts.

If the original accounting adjustment was incorrect or made at the wrong time, error corrections should be made in the normal way.

 Method 1: for errors of a net value that do not exceed £10,000, or errors of a net value between £10,000 and £50,000 that are within the limits described below

You can use this method to adjust your VAT account and include the value of that adjustment on your current VAT return providing:

  • The net value of errors found on previous returns does not exceed £10,000.
  • The net value of errors found on previous returns is between £10,000 and £50,000 but does not exceed 1% of the box 6 (net outputs) VAT return declaration due for the return period in which the errors are discovered.

To work out the net value of VAT errors on previous returns, you should work out:

  • The total amount due to HMRC, if any.
  • The total amount due to you, if any.

If the difference between the two figures is greater than £10,000 and exceeds 1% of the box 6 (net outputs) VAT return declaration due for the current return period during which the error is discovered, you must use Method 2. You must always use Method 2 if the net errors exceed £50,000 or if the errors made on previous returns were made deliberately.

If you consider that the error corrected using Method 1 was a result of careless conduct you will not be able to gain the maximum reduction of the penalty unless you also notify HMRC separately in writing, either by letter or by completion of the form VAT652, of both:

  • The error.
  • Your grounds for seeking a reduction to the penalty.

This will be an unprompted or prompted disclosure depending on the circumstances.

 

Method 2

Where a business makes an error correction using Method 2, they are not required to amend the input tax claimed or output tax charged recorded in the digital record of the supply.

Method 2: for errors of a net value between £10,000 and £50,000 which exceed the limits described below, or errors which exceed £50,000 or for errors of any size

You must use this method if:

  • The net value of errors found on previous returns is between £10,000 and £50,000 and exceeds 1% of the box 6 (net outputs) VAT return declaration due for the current return period during which the error was discovered.
  • The net value of errors found on previous returns is greater than £50,000.
  • The errors on previous returns were made deliberately.

You may, if you wish, use this method for errors of any size which are below the limits above instead of a Method 1 error correction. If you use this method you must not make adjustment for the same errors on a later VAT return.

When notifying HMRC of an error correction you should use form VAT 652. This can be printed from HMRC's website at hmrc.gov.uk or your can request a form by contacting the VAT Helpline on: 0300 200 3700.

If you are unable to obtain a form you should, by reference to business records in your possession, write to the appropriate office and provide full details of the errors including:

  • How each error arose.
  • The VAT accounting period in which it occurred.
  • If it was an input tax or output error.
  • The VAT underdeclared or overdeclared in each VAT period.
  • How you calculated the VAT underdeclared or overdeclared.
  • Whether any of the errors resulted in you paying HMRC an amount that wasn’t due.
  • The total amount to be adjusted.

If the error was an amount underdeclared include sufficient detail about the error on a separate sheet if necessary, to enable HMRC to decide whether they should charge interest. You can find further information about interest in VAT Notice 700/43: default interest.

 

Useful guides on this topic

Correcting VAT errors
What are the VAT error correction time limits? Can you correct errors through the VAT return? Do you have to notify HMRC?

Penalties (VAT)
When do penalties apply for VAT? What penalties are charged and how can they be mitigated?

VAT reclaims and unjust enrichment
When can VAT reclaims be made? What is unjust enrichment? What effect can unjust enrichment have on reclaims?

Bad debts: VAT recovery
When can you recover VAT on a bad debt? How much VAT is payable to HMRC or recoverable from HMRC when only part of an invoice is paid?

What constitutes a valid VAT invoice?
What is a valid VAT invoice? Can you claim back VAT if the invoice is in someone elses' name?

External links

VAT652, Notification of errors in VAT returns form

How to correct VAT errors and make adjustments or claims (VAT Notice 700/45)


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