Cropped woman in a lilac blazer writing on an electronic notepad | How to correct VAT errors and make adjustments

How to correct VAT errors and make adjustments

March 14, 2023
Mistakes can happen, after all we’re only human. This applies to tax and accounting too.When it comes to filing your VAT return, it can be easy to overlook inaccuracies or accidentally calculate a number incorrectly.Should you find yourself in this situation, the first step is not to panic — it’s not as difficult to correct errors in your VAT records as you may think. As long as the corrections you’re making comply with certain conditions, you don’t even need to tell HM Revenue and Customs (HMRC) — you can simply put them right by adjusting your next VAT return.In this article, we’ll explore how to correct VAT errors and make adjustments on VAT returns for an earlier period. We’ll also cover reporting thresholds, define what qualifies as a reportable mistake and outline the types of errors that could result in an HMRC penalty.

What is the reporting threshold for VAT correction?

When it comes to reporting net errors for VAT returns, the threshold figure you need to remember is £10,000. Any net errors that don’t exceed £10,000, as well as satisfy the other adjustment conditions, can be corrected by adjusting your next VAT return.Errors with a net value of more than £10,000 up to a maximum of £50,000 can also be adjusted via your next VAT return, providing the error is not more than 1% of the Box 6 figure (total value of sales and all other outputs, excluding any VAT).Any VAT error that exceeds the reporting threshold must be reported to HMRC. They cannot be corrected by making a VAT adjustment in your next VAT return.Note: Always take extra care with VAT corrections that fall in a later financial year than the original transactions. You may need to make adjustments to the annual accounts in which the error arose.

How to correct VAT errors and make adjustments

As already mentioned, providing your error meets certain criteria, you can correct a mistake you’ve made in a previous VAT return by making an adjustment to a future VAT return. This is referred to by HMRC as a VAT notice 700/45.  In order to do this:
    The error must have been made in a return for an accounting period that ended less than 4 years agoThe error must have a net value (any VAT you overpaid minus any VAT you underpaid) that falls below the HMRC reporting threshold of £10,000The error must not have been intentional (any deliberate errors must be notified to HMRC)The net value of the error must be between £10,000 and £50,000, but less than 1% of the sales you reported in box 6 of the VAT return for the period in which you discovered the mistake
You can calculate the net value of errors by subtracting any VAT you’ve overpaid from any VAT you’ve underpaid.If your mistake meets these criteria, then you can amend them in your next VAT return by adding the net value to Box 1 (tax owed to HMRC) or Box 4 (tax due to your business) of your VAT return.However, for any errors on your VAT return that don’t meet these criteria, you’ll need to contact HMRC to report them. If you have any doubts, you should always seek advice from an accountant.
Further information on the Notice 700/45 VAT adjustment process can be found at GOV.UK.

Reportable errors explained

It isn’t possible to correct all errors by amending a VAT return. Any error which falls into the following criteria must be reported to HMRC:
    Errors with a net value above the reporting thresholdErrors made more than 4 years agoDeliberate errors
Note: Any deliberate or careless errors may incur HMRC penalties.

Notification of errors in VAT returns to HMRC

If you find yourself in the situation of needing to report a VAT mistake to HMRC because it falls outside of the criteria for making a VAT adjustment, you’ll need to fill out a VAT652 form.
A VAT652 form and it can be either be filled out online at GOV.UK, downloaded as a printable version or you can call the HMRC helpline on 0300 200 3700 and request a paper form in the post.

It is also possible to file an error report to HMRC without using form VAT652, but completing the form will make the process much smoother for both you and HMRC. If you are unable to access a form, then you can write directly to HMRC to report a VAT error at:HM Revenue and CustomsVAT Error Correction Team — SO864NewcastleNE98 1ZZUnited Kingdom

What information should you include when reporting a VAT error?

When you notify HMRC of an error in your tax return, you should have the following information close to hand:
    How the VAT error occurredThe VAT accounting period when the error occurredWhether the mistake due to an input tax or output tax errorWhether your business underdeclared or overdeclared the amount of VAT in each VAT periodHow you calculated this amountWhether any of the errors you are reporting have resulted in your business paying HMRC an amount that wasn’t dueThe total amount of VAT that needs to be adjusted

How much could a penalty be?

How much you pay in penalties depends not only on the nature of the error itself, but also on how prompt and transparent you’ve been in reporting it to HMRC.For instance, if HMRC considers the error to be a careless error, the penalty can range from 0% to 30% of the potential loss of revenue to HMRC, depending on how much you have disclosed and how quickly.However, if HMRC determines that an error is ‘intentional and secret’, you could face a penalty of up to 100% of the potential loss of income incurred by HMRC.As this can be a tricky area, even if your VAT adjustments don’t require you to make a voluntary disclosure, it can sometimes be advisable to make one, as it will give you extra protection from penalties.

Making Tax Digital for VAT

To minimise the risk of errors made in VAT returns, HMRC introduced Making Tax Digital for VAT, or MTD for VAT, to make it easier for VAT-registered small business owners and self-employed individuals to manage their tax returns.

Initially introduced in April 2019, business owners earning above the £85,000 VAT registration threshold were required to store digital VAT records and file VAT returns using MTD-compatible software.

In April 2022, this scheme extended to encompass all VAT registered businesses, irrespective of whether their taxable turnover is above the VAT registration threshold or not, excluding those eligible for VAT exemption.

If you’re worried about making a mistake on your next VAT return, Ember’s here to lend a hand. Not only will we register your business for VAT, but our team of expert accountants will draft, check and file your VAT returns for you.