HMRC tightens VAT correction error rules
HMRC has recently introduced significant changes to how taxpayers must correct errors on their VAT returns. The most notable change is the removal of form 652, which was previously the standard route for disclosing VAT errors to HMRC. Going forward, taxpayers must make corrections through their online HMRC account, or by submitting a detailed error correction notification letter.
The thresholds for making corrections remain unchanged. Net errors under £10k or below £50k and less than 1% of taxable turnover can be corrected on the current return, provided the error was not deliberate. In our experience, many organisations take advantage of this approach, as small VAT errors are common in even the most straightforward VAT returns, and sending error corrections to HMRC on a regular basis is time-consuming for taxpayers and HMRC.
HMRC has always required that all careless errors and deliberate inaccuracies are disclosed, regardless of their size or value. While this obligation is not new, HMRC has recently emphasised the importance of compliance, making it clear that such errors must be reported separately for the purpose of reducing any potential penalty. Therefore, careless errors within the limits may still be adjusted on your next VAT return, but must also be reported separately.
Careless errors prompted by an HMRC enquiry usually attract penalties of between 15% and 30%, whereas the unprompted disclosure of a careless error may see those penalties mitigated to 0%.
The only way to ensure that no penalties are due is to demonstrate to HMRC that any errors have arisen despite reasonable care being taken. This becomes increasingly difficult when a taxpayer continues to submit similar error corrections.
To persuade HMRC that they have acted reasonably, taxpayers may be required to demonstrate compliance with HMRC’s Guidelines for Compliance, including the recently published Guidelines for Compliance 13 – “Help ensuring documents filed with HMRC are correct and complete”.
Furthermore, it is to be expected that HMRC officers will raise the issue of VAT errors during VAT audits. Taxpayers should be prepared for difficult conversations with the increased possibility of penalties and interest charges being imposed. Staying informed and acting promptly is therefore essential for taxpayers to minimise their costs.