Andrew Needham looks at what methods are available to correct errors on a VAT return.
When a business discovers it has made a VAT mistake it needs to correct it in order to avoid paying additional interest and penalties, but it has to follow certain procedures or it could still find itself still liable to a penalty.
What type of error?
The error correction procedure has two separate elements. Errors under £10,000 can be adjusted on the VAT return, and on the face of it there are no penalties or interest to pay. Errors over £10,000 must be notified to HMRC separately, and are subject to interest and penalties ranging from:
- up to 30% for a careless error;
- up to 70% where it is found to be deliberate; and
- up to 100% where it is both deliberate and concealed.
HMRC takes the view that most penalties are careless, so the normal range of penalties is 0-30%. Errors can also be either prompted (i.e. discovered by HMRC – normally during an inspection) or unprompted where the business discloses it to HMRC prior to notification of an inspection. Unprompted disclosures attract a reduced level of penalty.
Notify HMRC
Most businesses are not aware that to avoid a penalty on an error that has been corrected on a VAT return the business must also ‘notify’ HMRC of the error even if it is below £10,000 and is adjusted on the VAT return.
Example: VAT underpayment
A business discovers an underpayment of output tax of £1,500 due to failing to account for the VAT on the sale of second-hand machinery as it was dealt with outside the normal sales ledger system. As the amount is under £10,000 the business adjusts it on its VAT return and thinks that it has fulfilled its obligation.
HMRC carries out a VAT inspection 12 months later and discovers the adjustment in the company’s VAT account. As the error was not disclosed to HMRC at the time it is liable to a penalty. HMRC would consider it to be a careless error and so the company would be liable to penalty in the 0-30% range. Because HMRC ‘found’ it during the inspection it is considered to be ‘prompted’ rather than unprompted, so the penalty range would be 10-30%.
This means that, depending on other mitigating circumstances, they would receive a penalty in the range of £150 - £450 even though the error had been adjusted 12 months earlier. There would be no interest charge as the money had been paid over to HMRC.
To avoid a penalty in these circumstances, the business should write to HMRC with the following information:
- the period the error was made in;
- the amount of the error;
- the reason for the error; and
- the period the adjustment was made in.
If this procedure is followed, the error will be considered to have been notified to HMRC and no penalty will be levied on the business.
Get the penalty suspended
If a business fails to notify HMRC of an error and they do try and impose a penalty, a business should show that it has amended its systems to prevent similar errors from happening again in the future.
If a business can show that it has taken action to prevent the error from happening again, the penalty can be suspended and therefore avoided provided the business makes no more errors during the period of suspension.
Practical tip
If a business has an error in its VAT records under £10,000, it can adjust it on its next VAT return; however, to avoid a penalty it will also have to write to HMRC informing of the correction it has made.
