Correcting VAT errors on earlier returns

The error correction threshold

Method 1, next return

Net errors up to £10,000, or up to 1% of the current return's box 6 figure where that is more, capped at £50,000 (VAT Notice 700/45)

Method 2, separate disclosure

Net errors over that limit, any net error over £50,000, and deliberate errors

Time limit

4 years, with no limit for deliberate errors

Form VAT652

Withdrawn; it can no longer be used (GOV.UK)

Working out the net value

The net value is the total of errors in HMRC's favour set against the total of errors in the business's favour, across all the earlier returns being corrected (VAT Notice 700/45). Use the net figure for the threshold test, and keep a record of each error.

For example, a client finds £14,000 of output tax under-declared and £3,000 of input tax not claimed. The net error is £11,000 in HMRC's favour. If box 6 on the current return is £2,400,000, 1% is £24,000, so the £11,000 can go on the current return. If box 6 is £600,000, 1% is £6,000 and the limit is £10,000, so the £11,000 must be disclosed separately.

Method 1 correcting on the next return

1. Check the threshold

   Confirm the net value is within the method 1 limit and that no error is deliberate (VAT Notice 700/45).

2. Adjust the VAT account

   Adjust the VAT account for the tax over or under-declared and include the adjustment on the current return.

3. Record it

   Keep an error log showing the date found, the period it relates to, the documents behind it and whether it is output or input tax.

4. Consider penalties

   Correcting by method 1 is not a disclosure for the penalty rules. If the error may have been careless, also tell HMRC separately in writing to get the maximum reduction.

Method 2 telling HMRC separately

1. Use the online form

   Report errors to HMRC online, or in writing. GOV.UK also lets a business check which route applies using the net value of the error and its total sales.

2. Give the detail

   Say how each error arose, the VAT period affected, whether it is input or output tax, the amount over or under-declared and how it was worked out (VAT Notice 700/45).

3. Choose method 2 for any error

   A business can choose method 2 for errors of any size.

The 4-year time limit

For under-declared or over-declared output tax, and over-claimed input tax, the 4 years run from the end of the VAT period in which the error occurred. For under-claimed input tax they run from the due date of the return for that period (VAT Notice 700/45).

For example, input tax that should have been claimed on the quarter to 31 March 2023, with a return due 7 May 2023, can be corrected up to 7 May 2027. There is a separate rule for tax point errors that fall across adjacent periods.

Deliberate errors

A deliberate error must be notified to HMRC in writing or through a method 2 error correction notification, whatever its size (VAT Notice 700/45). The 4-year time limit does not apply to deliberate errors.

Late payment interest applies. For a careless error, a penalty applies unless the business shows it took reasonable care, and a disclosure made before HMRC finds the error reduces it (VAT Notice 700/45).

Adjustments that are not errors

• Retail scheme annual adjustments (VAT Notice 700/45).
• Capital Goods Scheme adjustments.
• Bad debt relief.
• Partial exemption annual adjustments. See partial exemption.
• These go on the return in the normal way and do not count towards the error correction threshold.

Questions