As with any bookkeeping, errors can happen when completing a VAT return, especially if you’re maintaining a small growing business. VAT is incredibly complicated, and you should always seek advice about the VAT treatment of any transaction if you are uncertain. If you realise you’ve made a mistake once you’ve submitted a VAT return, try not to panic! Although sometimes simple, these errors can lead to significant VAT Penalties. Business owners should seek specialist VAT advice regularly to ensure they do not fall into these traps. The process for reporting and correcting VAT errors is relatively straightforward, and this brief guide explains the steps you should follow. This simple guide explains what to do in both scenarios.
As a VAT-registered business, you must submit VAT returns every three months.
Your VAT online account tells you:
- when your VAT Returns are due
- when the payment must clear HM Revenue and Customs (HMRC) account
When you submit the Return, the figures for the amount of VAT you collected and paid should be accurate and based on the correct rate of VAT. However, suppose you realise after submitting a return that you mistakenly omitted a receipt or a payment, charged a customer the wrong VAT rate, or made an error in your calculations. In that case, you must act quickly to put matters right.
Calculating the net value
To calculate the net value of errors, you must do the following
Add up the additional tax due to HMRC
Adjustments conditions
In certain circumstances, you can correct an error that you made in a previous VAT return by adjusting a future VAT return. VAT Errors come in all different shapes and sizes, but they generally arise where there is an Error on a VAT Return. It can be where a business:
- Fails to record the VAT on a sale where it should have been
- Reclaims VAT on a cost where it should not have done so
- Makes a calculation error in a VAT return
- had a net error value (any VAT you overpaid minus any VAT you underpaid) below the HMRC reporting threshold of £10,000
- Error was not deliberate (you should notify HMRC of any deliberate mistakes by following the instructions below)
- Error was made in a return for an accounting period that ended less than four years ago
How to Make the Adjustment
You can adjust your next VAT Return if the net value of the errors is £10,000 or less. You can also adjust your next VAT Return if your error amount is up to 1% of your box 6 figure (up to a maximum of £50,000). If it is above the reporting threshold of £50,000, you must report to HMRC regarding the error.
If the error means you owe VAT, add the net value to box 1 of your Return. If the error means you are due a VAT refund, add the net value to box 4 of your Return. It’s essential to keep a record of the date of the error, the date you made the adjustment and the details of the error. You should also adjust your own VAT records to reflect the correct figures.
Reporting an error to HMRC
If you need to report a VAT return error to HMRC because it doesn’t fit the above criteria, you should fill out form VAT652 and send it to HMRC. While it’s possible to make an error report to HMRC without form VAT652, having one should make the process much easier. If you’re unable to access a form, you can write to HMRC directly to report an error.
When you contact HMRC, make sure you have the following to hand:
- details of how each VAT error arose
- the VAT accounting period in which the error(s) occurred
- if the mistake was an input tax or output tax error
- the amount of VAT under-declared or over-declared by your business in each VAT period
- how you calculated this amount
- whether any of the errors reporting resulted in your business paying HMRC an amount that wasn’t due
- the total amount of VAT to be adjusted
HMRC’s VAT Notice 700/45 provides detailed information about correcting VAT errors, but you should consult with your accountant if you have any concerns about your VAT return.
HMRC’s Penalties for VAT Errors
HMRC may charge you penalties and interest if an error is due to careless or dishonest behaviour. You should tell HMRC about careless errors separately in writing, as well as adjust your current VAT Return. It may lead to a reduction in the penalty. If you’re late filing a VAT return or making payments to HMRC, you’ll enter a 12-month probation period. Should you file any further late returns or make late payments within this 12-month ‘surcharge period’, you will incur a default surcharge penalty. The probation period is reset for a further 12 months.
Prompted errors attract higher penalties than unprompted errors, so it’s essential to notify HMRC if you spot an error. In order for HMRC to consider any reduction to a penalty, you should inform them that you have made a careless error or deliberate inaccuracy regardless of its size or value. You need to be aware that HMRC might choose to issue you with a penalty if they consider that you have acted carelessly or dishonestly. The penalty can range from:
- up to 30% if you have been careless
- up to 70% where it’s a deliberate error
- up to 100% if it was is both intentional and concealed
You should receive a reply from HMRC to confirm if your calculations are correct within 21 days. If you manage to convince HMRC that the appropriate action has been taken to prevent these errors from happening again, they may suspend the penalty.
Conclusion
Every business calculates the VAT amount, makes a return and sends it to HMRC. Not every Return but some of the returns may contain errors, and it is best to solve the same by making adjustments as early as possible before sending it to HMRC. However, you mustn’t make any further errors during the period the penalty is suspended. If you would like professional tax advice on any aspect of VAT reporting or error correction or would like confirmation that you are complying with HMRC’s VAT rules, Bloom Financials experienced tax consultants will be glad to help.
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