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19 February 2019

Correcting errors on previous VAT returns


I prepare and complete the quarterly VAT returns for my small business and noticed recently that I had made some errors in previous returns. Can you advise how I correct these, and will there be any penalties or interest to pay on this?


If you’ve made a mistake on a previous VAT return, it’s important that you take the right steps to remedy this, or you could end up paying a hefty financial penalty.

There are two different steps to take depending on whether the error on your VAT return is under £10,000 or over £10,000.

If the error is less than £10,000 this can be adjusted by including it on your business’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 discussed below.

If the error is above £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.

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.

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 £2,000 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.

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 £200 to £600 even though you corrected the mistake.

In order to avoid the penalty 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.

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 errors 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.

The advice in this column is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
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