Coming Clean on VAT Errors
You will soon be able to correct errors of up to £10,000 in your VAT returns, and in some cases more, without making a specific disclosure. It is tempting to sweep up mistakes without drawing attention to them, but doing so could increase any subsequent penalties and interest charged for the error.
For VAT periods that started before 1 July 2008, errors do not have to be disclosed if their total value is not more than £2,000. This limit goes up to £10,000 for periods starting on or after 1 July 2008, except for businesses with a turnover of more than £1 million. For these larger businesses, the limit is 1% of turnover up to a maximum of £50,000. A potential difficulty arises under the new penalty regime that applies to returns for periods starting after 31 March 2008, where the return is due after 31 March 2009.
If the error arose because the taxpayer did not take reasonable care, or made a deliberate misdeclaration, a voluntary disclosure can significantly reduce the penalty.
For a disclosure to reduce a penalty, you have to specifically write to HM Revenue & Customs (HMRC) describing how the error happened, give HMRC reasonable help in quantifying it and allow HMRC access to records necessary to verify that you have fully corrected the error.
In future, if you find you have made errors on a past VAT return, as well as quantifying them, you will need to find out how they occurred. There will be no penalty if you took reasonable care but made a genuine mistake. If you are confident of this, you can safely include errors below the limit on a subsequent return, but you should keep evidence of the processes you followed. If you conclude that the error occurred because you did not take reasonable care, you should make a separate disclosure to HMRC even if the error is under £10,000. From September 2008, any errors separately disclosed to HMRC will also attract an interest charge where that error resulted in an underpayment of VAT.
Clearly it is far better not to make mistakes in the first place. If you need advice on accounting for VAT, completing your VAT returns or correcting or disclosing errors, do ask us.