It has long been accepted that businesses can and do make mistakes on their VAT returns from time to time. As long as the amount of VAT in question was under £2,000 they didn’t have to declare the error but could just correct it on the next return they filed.

If the amount involved was over £2,000 the business had to inform HMRC (Her Majesty’s Revenue & Customs) and any correction – money due to be paid or claimed back – would be accounted for separately. The business would also be liable to pay penalties and interest on any underpayment.

However that has all now changed and the situation is much more complex. The good news is that the £2,000 limit has been increased to £10,000 and for larger companies the figure is 1% of the value in Box 6 of the return, up to a maximum of £50,000. This procedure can only be used for errors that occurred within the previous 4 years.

The bad news is that when a business has made an error on a VAT return, the interaction of new penalties and the voluntary disclosure process (now called “error correction”) is complicated and can result in higher penalties and interest.

Can You Avoid a Penalty Charge?

Yes, if the error was made despite you taking reasonable care then no penalty will apply. However there is no statutory definition of careless, other than it is “a failure to take reasonable care” and so HMRC have provided guidance on how they will interpret the term “reasonable care”.

The problem is that after you have read the HMRC guidance you are likely to be more confused than when you started.

So here is a brief “translation” of the HMRC guidance:

  1. In deciding whether someone has taken “reasonable care” or not HMRC will take into account the knowledge and circumstances of the person completing the form. So a self-employed person with no accounting knowledge will be viewed differently than someone competing a form for a large company with its own accounts department.
  2. Notwithstanding the above HMRC would expect someone uncertain about an unusual transaction about which they have no experience to seek appropriate advice from an accountant or from HMRC itself.
  3. HMRC expect each person to make and preserve sufficient records for them to make a correct and complete return. A person with simple, straightforward tax affairs needs only a simple regime provided they follow it carefully. But a person with larger and more complex tax affairs will need to put in place more sophisticated systems and follow them equally carefully.

Therefore in order to decide whether there is a risk of penalty, you will need to assess whether the error was made despite reasonable care. This could be difficult but bearing in mind the expectations of HMRC the following may help:

  1. As there is a statutory obligation to keep proper records, supported by detailed guidance, if the error arose through lack of proper records, it is not likely to meet the necessary standards of care for a VAT registered business. 
  2. When someone is unsure about something, the basic guidance on taking care expects him or her to seek advice from an appropriate source. This might be their accountant, the HMRC telephone help or another source of help. It is unlikely that checking with “the man down the pub” would be sufficient to demonstrate reasonable care. If having checked, there is still a mistake you could still be said to have exercised reasonable care within your abilities and circumstances. 

How Much Will the Penalty Charge Be?

HMRC publish a “pricelist” of what penalties will be charged. If you don’t tell them about your error (they find it when they inspect your records) you will be liable to a penalty of between 30% and 100%. If you do tell them then the penalties will be reduced by up to 50%. You can download a fact sheet here.


Strictly speaking even if the error is under £10,000 you should still inform HMRC but if the error is of very small magnitude it is unlikely that HMRC would bother with a penalty if they subsequently discover the error, particularly if you have taken steps to make sure the error doesn’t happen again. But that is your call. Even if you take advice from your accountant on this, or any other matter, don’t forget that it is you, the taxpayer, who is responsible for any error not your accountant.

Also See:

Category: Taxation

2 Responses to “New Rules on Correcting an Error on Your VAT Return”

  1. James Green says:

    Ros, I wouldn’t worry too much about the address being used for the VAT registration. If he owns the property or has permission he can use any address he likes. Of course this guy has to charge you VAT and his use of the term “supply and fit” may be a mistake. If he has listed any items which you paid for then that is wrong and he should remove them. The lack of a consecutive number would really only be a problem if you were VAT registered because without it you would not be allowed to reclaim the VAT.

  2. Ros says:

    I am a member of the public. A tradesman who is VAT registered is charging me VAT for work done. The VAT invoice does not have a serialised number, although does have registered VAT no., does not break down and separate unit price and VAT of materials used, does not state hourly rate of labour, or amount of labour.
    Has grossly overcharged me for ‘supply and fit’ when he did not , I went to another supplier myself for this purpose. Then, on these goods he has charged VAT upon VAT and overcharged me as well. What do do?
    He also uses an address of a property he rents out to a tenant, to register his businessf for VAT . He lives elsewhere. What can l do? Thankyou.

Leave a Reply