How to Correct Errors in VAT Returns: A Comprehensive Guide

Correcting errors in VAT returns is an essential aspect of maintaining compliance with HMRC regulations. Whether you’ve discovered an underpayment, an overpayment, or a simple mistake, it's crucial to know the right steps to take. This article will guide you through the process, covering when you can adjust a future VAT return, when a separate process is necessary, how long changes take to reflect online, and the potential consequences of errors.

1. When Can I Adjust the Following VAT Return?

You can make adjustments to your next VAT return for errors made in previous returns if the error meets certain conditions:

• Net Value Limit: If the net value of the error is £10,000 or less you can just make the adjustment in the next VAT return after noticing the error. If the net value of the error is between £10,000 and £50,000, you can still correct the error in the next VAT return but only if the error is less than 1% of your box 6 figure (total sales excluding VAT) on the VAT return where you made the error.
• Time Limit: The error must have occurred within the last four years.

If your error falls within these limits, you can simply include the adjustment in the VAT you declare on your next return. This is a straightforward method, which is convenient for businesses managing minor errors without needing to involve additional paperwork or separate processes.

2. Making Changes to the Next VAT Return Using Bookkeeping Software

When using bookkeeping software like Xero or QuickBooks Online (QBO), correcting errors on your VAT return can be straightforward and automated. These platforms typically allow you to make adjustments directly within the software, which will automatically reflect in your next VAT return.

Process Overview:

1. Identify the Error: Once you identify an error in a past VAT return, you can correct it by making an adjustment in the corresponding transaction within the software. For instance, if you under-reported VAT in a previous period, you would locate the relevant invoice or expense entry and adjust the VAT amount.
2. Automatic Adjustment: After the correction is made, the software will automatically adjust the VAT amount in the next return. This is typically done by amending the VAT return figures that are pulled directly from your ledger accounts, ensuring that your VAT liability is accurately updated.
3. Review and Submit: Before submitting your next VAT return, it's important to review the adjustments made to ensure they are correctly accounted for. Both Xero and QBO provide a detailed summary of VAT transactions, including adjustments, allowing you to verify that the error correction is properly reflected.
4. Reporting to HMRC: If the correction meets the criteria for adjustments without needing to separately notify HMRC (i.e., within the £10,000 or £50,000 thresholds), the software will include this in the next submission without further action needed. However, if a separate disclosure is required (e.g., using form VAT652), you must follow HMRC’s procedures outside of the software.

Using bookkeeping software simplifies the process, reduces manual errors, and ensures that your VAT returns remain compliant with HMRC’s regulations. This seamless integration helps businesses manage their VAT obligations more efficiently, particularly for minor adjustments that do not require additional reporting.

3. When Is a Separate Process Required?

If the error exceeds the £50,000 threshold or does not fall within the four-year time limit, you must report the error separately using HMRC’s form VAT652. This process is known as making a “voluntary disclosure.”

A separate disclosure is also necessary if the error resulted from deliberate or fraudulent activity. In such cases, it’s advisable to address the issue directly with HMRC to avoid further penalties.

4. How Long Until Changes Are Reflected Online?

Once you’ve submitted the correction, the time it takes for the changes to reflect online can vary:

• Adjustments Made in the Following VAT Return: If you’ve corrected an error in the next VAT return, the changes will typically be reflected in your VAT account after that return is processed. This usually takes a few days after submission, depending on HMRC’s processing times.
• Separate Disclosure via VAT652: If you’ve used form VAT652 to report an error, HMRC will review the disclosure, which could take several weeks. The correction will be reflected in your VAT account once HMRC has processed the form and made the necessary adjustments.

5. Should I Pay Additional VAT Immediately After Correction or Wait?

If your correction results in additional VAT being due, it is prudent to pay the amount as soon as possible rather than waiting for the correction to appear online. Paying promptly reduces the risk of incurring interest and late payment penalties. Ensure that when you make the payment, you clearly state that it relates to an error correction to avoid any confusion.

6. What Kind of Penalties Can I Expect?

Penalties for errors on VAT returns can vary depending on the nature of the mistake:

• Careless Errors: If HMRC deems the error to be due to carelessness, penalties typically range from 0% to 30% of the VAT underpaid. This percentage may be reduced if you voluntarily disclose the error and cooperate fully with HMRC.
• Deliberate Errors: For deliberate errors, penalties can be much harsher, ranging from 20% to 70% of the VAT underpaid. In cases of deliberate concealment, penalties can increase to 100% of the underpaid VAT.

It’s important to correct errors as soon as they are discovered to mitigate potential penalties. If you can demonstrate that the error was a genuine mistake and take steps to correct it promptly, HMRC may reduce the penalty.

6. Will I Be Investigated?

Correcting an error does not automatically trigger an investigation by HMRC. However, if the error is significant or suggests a pattern of non-compliance, HMRC may choose to investigate further. Voluntary disclosure of errors is often viewed favorably by HMRC and can reduce the likelihood of an investigation.

If you have a history of compliant behavior and the error is minor, it’s less likely that you will face an investigation. Nonetheless, it's crucial to maintain accurate records and demonstrate due diligence in your VAT reporting to avoid complications.

Conclusion

Correcting errors in VAT returns is a critical responsibility for businesses. By understanding when you can make adjustments in your next VAT return and when you need to follow a separate process, you can manage your VAT obligations effectively. Timely payment of any additional VAT due, awareness of potential penalties, and proactive correction of errors can all help in maintaining good standing with HMRC and avoiding more severe consequences. In any doubt you should talk to the VAT team at HMRC or your accountant.