HMRC changes to VAT error disclosures – what do you need to know?

Overview

HMRC has introduced a new process for VAT correcting VAT errors, replacing the paper 652 form with a more modern, digital approach. The online form can be completed through your own government gateway account but can also be completed by agents you have authorised through their agent account. More details can be found below on what changes have been made to the criteria for making VAT error disclosures to HMRC.

Criteria for careless errors

HMRC have confirmed that correcting an error through a current VAT return does not count as notifying HMRC for the purposes of reducing penalties when it considers the error to be “careless”. A careless error is defined by HMRC as “failure to take reasonable care”, for more information on this click here.

Therefore, under the new rules, HMRC will still allow businesses to adjust for the error on its next return if the net value of the error (difference between overclaimed and underclaimed VAT) meets one of the following criteria:

• Is less than £10,000 or,
• between £10,000 and £50,000 AND less than 1% of the total value of sales and other purchases on the return where the correction is made.

However, you must also still disclose the error to HMRC, so as to mitigate/reduce the penalty.

Alternatively, a disclosure can just be made online even if it meets the conditions above.

All other errors

For any errors that are not considered careless the rules have not changed, and the error must still be disclosed to HMRC.

What is the alternative to online error disclosure?

If you do not wish to complete the online form, a letter can be sent to HMRC to disclose any error, but it must contain all of the following information, otherwise it could be rejected:

• how each error arose
• the VAT accounting period in which it occurred
• if it was an input tax or output tax error
• the VAT underdeclared or overdeclared in each VAT period
• how you worked out the VAT underdeclared or overdeclared
• whether any of the errors resulted in you paying us an amount that was not due
• the total amount to be adjusted

What are the penalties for careless VAT errors?

Careless errors can attract penalties of 15% to 30%. But if the error is disclosed to HMRC rather than HMRC discovering it, then it is classed as an unprompted disclosure, and the penalty could be reduced to zero.

Summary

Even if a VAT careless error meets the criteria to be adjusted on the next VAT return, it must still be disclosed separately to HMRC otherwise it will not count as ‘notifying’ HMRC for penalty mitigation.

Please get in touch if you would like to discuss any of the above in further detail.