The best procedure for correcting errors on VAT returns

There are two different steps to take depending on whether you are correcting errors on VAT returns which are either under £10,000 or over £10,000.

If the error is less than £10,000 this can be adjusted by including it on your company's latest VAT return and so in theory there should be no penalties or interest to pay.  However to be absolutely sure that HMRC will not levy a penalty you should disclose the error anyway as shown below.

What happens if the error is over £10,000?

You are required to formally notify HMRC and the error will be subject to interest and penalties ranging from up to 30% for a careless error, up to 70% where this is deemed to be a deliberate error and up to 100% where this error is both deliberate and concealed.

What's HMRC approach to errors on VAT returns?

HMRC are usually of the opinion that most errors are careless so penalties tend to range from 0-30%. Errors can either be prompted (discovered by HMRC during a VAT inspection) or unprompted, where you make a voluntary disclosure to HMRC before a VAT inspection. Unprompted disclosures attract a lower level of penalty, so where you discover an error has been made, it's always a good idea to notify HMRC immediately.

Do I need to notify HMRC where the error is less than £10,000?

If you want to ensure that you avoid a penalty on an error that has been corrected on a VAT return then you must also notify HMRC of the error even where it is less than £10,000.

An example

You discover that you over-claimed VAT on equipment when you first set up your company. This error amounts to £2,300 and so you add this amount to your company's latest VAT return thinking that you've fulfilled your obligations.

HMRC carries out a VAT inspection a year later and discovers the error in the company's VAT account. Because the error was not reported to HMRC at the time, your company is liable to a penalty. HMRC would usually consider this to be careless and subject to a penalty in the 0-30% range (see above).

However because HMRC have 'discovered' this error as a result of their inspection they consider this error to be a prompted (rather than unprompted) and so your company is potentially liable to a penalty ranging from 10-30%. Your company is therefore potentially facing a penalty ranging from £230 to £680 even though you corrected the mistake a year ago!

Is there any way a penalty can be avoided in these circumstances?

It's important to write to HMRC with the information detailed below, at the same time as you make the adjustment to your company's VAT return:

• The VAT period the error was made in.
  

• The amount of the error.
  

• The reason for the error.
  

• The VAT period the adjustment was made in.

Can I avoid a penalty if I've failed to notify HMRC and they spot this in an inspection?

If an error of less than £10,000 is spotted by HMRC at a later date and they try to impose a penalty you should demonstrate that you've amended your systems to prevent similar erros happening in future. If you manage to convince HMRC that the appropriate action has been taken to prevent these errors happening again, then they may suspend the penalty. However it's vital that you don't make any further errors during the period the penalty is suspended.

If you're concerned about your VAT situation, or would like any other help with your business feel free to get in touch.

Disclaimer