VAT error correction

In this episode, James Hurst breaks down the latest updates to HMRC’s guidance on correcting VAT errors, including the introduction of a new online tool for notifying HMRC. Tune in for practical insights and learn what these changes mean for your business.

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Transcript

This is James Hurst, and I’m going to spend the next few minutes talking about correcting errors in VAT returns. This was prompted by a recent change in HMRC’s procedures, and I also want to take the opportunity to highlight a couple of useful practical points.

In early September, HMRC updated their Notice 700/45 entitled How to Correct VAT Errors and Make Adjustments or Claims. As the title implies, the guidance covers what to do if you’ve made an error: how to amend your VAT records, how to correct errors made in previous VAT returns, and how to claim a refund if you’ve wrongly accounted for VAT.

Reading through the updated notice, a couple of points stood out. One is the apparent demise of form VAT652 and a change in HMRC’s online procedures. The other is that the guidance clarifies an important point about penalties. There’s a common misconception that if you can correct an error in your VAT return, there’s no penalty. While this might often be the case, it’s not automatic at all — the position is more subtle than that.

So, let’s explore these points further and recap the basic rules for correcting errors in VAT returns. Notice 700/45 explains that if you’ve made an error in a previously submitted VAT return, you have three options: update your next VAT return, notify the correction to HMRC online, or notify HMRC in writing. That last point reflects the law, which was drafted long before online services existed. In practice, most people don’t just write a letter anymore.

However, all of these options are not necessarily available in every case. It depends on the size of the error and the circumstances, but mainly on the amount of VAT that needs correcting. Broadly, there are two thresholds to consider, known as Method 1 and Method 2.

Method 1 allows you to adjust your VAT account directly if the net value of the error (or errors combined) does not exceed £10,000, or if it is between £10,000 and £50,000 but does not exceed 1% of box 6 outputs in the VAT period in which you discovered the error.

Method 2 applies if the error is above £10,000 and exceeds 1% of box 6 outputs, or if it is above £50,000. It also applies to any deliberate errors, which must always be reported to HMRC.

What’s changed is that the guidance no longer mentions form VAT652, which was traditionally used to notify HMRC of error corrections. There hasn’t been any formal announcement that the form has been withdrawn, but the new guidance directs you to notify errors online via the Government Gateway. This suggests VAT652 has been phased out after nearly 40 years.

The guidance also reminds us of important points such as the four-year cap for adjustments, which applies whether you’re reclaiming or correcting VAT. Errors older than four years, if non-deliberate, are out of time. HMRC also emphasises that if you’re charged VAT incorrectly by a supplier, it’s a commercial issue to resolve with them, not HMRC.

Another common area is input tax. If you didn’t claim VAT in the correct period despite having the evidence, HMRC views that as an error that must go through error correction procedures. Many taxpayers assume they can just claim it in the next return, but technically it counts as an error correction.

This brings us back to penalties. HMRC say penalties apply where an error was careless or deliberate, but not where you took reasonable care. Careless errors can attract penalties of up to 30%, though this can be reduced or suspended. Importantly, if you correct a careless error using Method 1 (adjusting in your VAT return), HMRC expect you to also notify them in order to qualify for a reduced penalty.

So, while small errors can technically be corrected in your VAT return without notification, if there’s any risk HMRC may see it as careless, it may still be worth notifying them online to avoid penalty uncertainty.

In conclusion, the updated guidance makes clear that adjusting a VAT return does not automatically remove the risk of penalties. Each case needs to be judged on its facts, and sometimes notifying HMRC is the safer route.

Thanks for listening — that concludes my comments on HMRC’s updated guidance on VAT error correction.