How To Correct Errors On VAT Returns
Businesses normally do care when filing their VAT returns but still there could be an error when filing a VAT return. Where an error on a past VAT return is uncovered, businesses have a duty to correct the error as soon as possible. As a general rule, any necessary adjustment can be made on a current VAT return. However, in order to be able to do so, there are three important conditions that must be met:
- The error must be below the reporting threshold.
- The error must not have been deliberate.
- The error can only relate to an accounting period that ended less than 4 years ago.
Under the reporting threshold rule, businesses can make an adjustment on their next VAT return if the net value of the errors is £10,000 or less. The threshold is further increased if 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 figure for the return period in which the errors are discovered.
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VAT errors of a net value that exceed the limits for correction on a current return or that were deliberate should be notified to HMRC using form VAT 652 (or providing the same information in letter format) and should be submitted to HMRC’s VAT Error Correction team.
- The inaccuracy penalty, applies where there is an understatement of a VAT liability (or a false or inflated repayment claim), and
- The inaccuracy must be careless, deliberate or deliberate and concealed
- There is a further penalty if HMRC issues a VAT assessment which understates the tax due, and the taxpayer does not take reasonable steps to notify HMRC of the error within 30 days.
The penalty does not apply where the taxpayer has, in the view of HMRC, taken reasonable care in filing returns but makes an innocent mistake. Where it does apply, it is calculated as a percentage of ‘potential lost revenue’ as follows:
- Lack of reasonable care errors – up to 30% of ‘potential lost revenue’
- Deliberate errors – between 20% and 70% of ‘potential lost revenue’
- Deliberate and concealed errors – between 30% and 100% of ‘potential lost revenue’
HMRC may also charge penalties and interest if an error is due to careless or dishonest behaviour.
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