HM Revenue & Customs require that businesses maintain specific records and a VAT account that is used to complete the VAT Return. A business may have robust systems in place to produce accurate information, however, we are all human and mistakes will sometimes occur which may find their way on to a VAT Return, which consequently gets submitted to HM Revenue & Customs.
If a business identifies an error on a VAT Return that has already been submitted to HM Revenue & Customs it needs to act immediately.
The business needs to check the end date of the VAT period when the error was made. Prior to the 31 March 2009 it was not possible to rectify an error on a VAT Return that was more than 3 years old, however, from the 1 April 2009 the time limit was incrementally increased to 4 years. It should be notes that the time limit does not apply if the errors are tax point (i.e. time of supply errors) and these can be corrected at any time.
When correcting any errors it is important to take care. If a business makes a careless or deliberately inaccurate error correction the business may be charged a penalty if found out. In reality, the majority of small errors will not be careless or deliberate, therefore HM Revenue & Customs are unlikely to impose a penalty. People do make mistakes and HM Revenue & Customs do appear to appreciate this, however repeat offences of the same errors are not looked upon favorably.
The business needs to investigate and identify how and why the error arose. Was it a result of system failure? Are the records up to scratch? Do the accounts staff know what they are doing? Does the business need to provide additional training? There are many possibilities of error and the business needs to find out what caused it and put measures in place to eliminate errors in the future. Some errors need to be disclosed to HM Revenue & Customs and some do not, therefore this is an important step to enable the business to accurately assess whether disclosure is required or not.
Sometimes errors occur even though the business has taken reasonable care in preparing the VAT Return. The business isn’t trying to defraud HM Revenue & Customs and the error is nothing no more than a mistake. In these circumstances disclosure is not necessary.
Any errors resulting from careless behavior needs to be separately disclosed to HM Revenue & Customs in order to be considered for a reduction or suspension in any penalty imposed. Careless errors can occur when an employee (with little knowledge of VAT) prepares and submits the VAT Return without it being checked by the business owner.
Deliberate inaccuracies in a previously submitted return need to be disclosed immediately. In addition, these errors cannot be adjusted for in a later return. Deliberate errors may occur when an employee of the business intentionally prepares and submits an incorrect VAT Return which is not checked by the business owner before it is filed.
In many instances it is the business’ accountants or auditors that discover careless errors and deliberate inaccuracies. Under their professional body guidelines accountants and auditors will have a duty to disclose the errors to HM Revenue & Customs, so if the business owner gets in there first, HM Revenue & Customs may be more willing to consider a reduction in penalty.
At the end of each VAT accounting period the business must calculate the net value of all the errors found during the period that relates to VAT Returns that have already been submitted. Any input VAT that hasn’t been paid over to HM Revenue & Customs should be added up and any output VAT that has not been reclaimed should be deducted. Any deliberate errors should be omitted from this exercise since these have to be separately disclosed.
If the value of the net errors is less than the greater of £10,000 or 1% of the box 6 figure on the VAT Return an adjustment is required on the current VAT Return, and any additional input VAT or output VAT is added to the current amounts as appropriate. In these instances, it is not necessary to disclose the error to HM Revenue & Customs.
If the value of the net error is more than the greater of £10,000 or 1% of the box 6 figure on the VAT Return the current VAT Return cannot be adjusted and the error must be disclosed to HM Revenue & Customs. The errors can be disclosed on Form VAT 652, alternatively the business can simply write a letter. Regardless of whether Form 652 is used or a letter is written when disclosing these errors HM Revenue & Customs require a lot of information, including;
i)Details of how the error happened
ii)The VAT period the error was made
iii)Whether it was an error on input or output tax
iv)How much VAT was over declared or under declared
v)How the error was calculated
vi)Whether the business is claiming a refund of an overpayment
vii)The total amount of the error
It should be noted that it is highly likely the business will have to pay interest on any under paid VAT from the due date to the date the error is settled.
Where there are small and one off errors on VAT Returns as business owner should not get too concerned, however if the errors are large and/or frequent then immediate action is required to sort the matters out.