Mistakes happen all the time, whether you forget to email your customers promptly, or you forget to put milk in your morning coffee (if you take milk, that is). But what happens when you make a mistake on your VAT return?
The first step is to correct the error, followed by reporting the error to HMRC if you need to.
But don’t panic. Most of the time, you don’t need to report anything to HMRC.
It’s as simple as making an adjustment to a future VAT return.
However, the error has to meet certain criteria for you to use this method:
- The error must have been made in an accounting period that ended less than four years ago
- The error must have a net value that falls below the HMRC reporting threshold of £10,000
- The error must not have been intentional
- The net value of the error must be between £10,000 and £50,000, but less than 1% of the sales reported in box 6 of the VAT return for the period in which you made the mistake.
If your mistake meets these criteria, you can simply amend them in your next VAT return by adding the values to either box 1 (tax owed to HMRC) or box 4 (Tax due to your business) of your VAT return.
However, if the error falls outside of these criteria, you’ll need to contact HMRC and report it - if you’re unsure, contact your accountant, who can advise you further.
The simple figure to remember is £10,000.
Any VAT errors that don’t exceed £10,000 (as well as satisfy the other requirements above) can be adjusted in your next VAT return.
If your VAT error exceeds £10,000 but is less than £50,000, it can still be corrected in the next return so long as the error is not more than 1% of the box 6 figure.
If your error is outside the threshold, you must report it to HMRC. Do not correct it by making an adjustment on your next return.
You can notify HMRC and update your VAT return by using the VAT652 form.
It is possible to notify them without completing the form, but it makes the process smoother for both HMRC and yourself if you do.
To make the process easier, you should have the following information available when filling out the VAT652 form:
- How the error occurred
- The VAT accounting period of the error
- Whether the mistake is due to input tax or output tax
- Whether your business over-declared or under-declared the amount of VAT due
- How you calculated the amount
- Whether the error resulted in you paying HMRC an amount that wasn’t due
- The total amount of VAT that needs to be adjusted
There are penalties ranging from 0% to 30% of the potential loss of revenue to HMRC for careless mistakes, but it depends on a number of factors.
The amount you pay will depend on the nature of the error, how prompt you have been in reporting it, and how transparent you have been.
However, if HMRC has found the error to be intentional and secret, you could face a penalty of up to 100% of the potential loss of income incurred by HMRC.