VAT – Avoiding the ‘Penalty trap’

Making a mistake in your VAT calculations can prove costly, particularly in view of the recent changes to the penalty regime. Of course, avoiding errors altogether is ideal, but what action should you take if you do make a mistake?

If you make an error in your VAT calculations you may include the under or overpayment in your next VAT return, providing the net errors for the period are within the specified limits.

New rules

For VAT periods ending before 30 June 2008 this error reporting limit was £2,000. However, for VAT periods beginning on and after 1 July 2008 this limit is increased to the greater of:

  • £10,000 or
  • 1% of the turnover for the period in which the error is found (box 6 on the VAT return), subject to a maximum error of £50,000.

Reporting the mistake

Where the net VAT errors – underpayments set against overpayments – exceed these limits, you should write to HMRC’s VAT Error Correction Team and divulge the details of your mistake.

You can use VAT form 652 to do this or you may supply the following information on business headed paper:

  • the VAT period when the error(s) was made
  • how the error occurred and whether it relates to purchases or sales
  • your calculation of the mistake and the total VAT payable or refundable.

The VAT office will normally reply with a demand for interest on the late paid VAT, if the error produces a net underpayment of VAT. Even if your net VAT error is within the error reporting limits, please discuss the situation with us before correcting the fault on your VAT return – it may be possible to minimise any penalty charged by writing to the VAT office instead.

Notification and details of the error should be mailed to the VAT Error Correction Team that deals with your postcode area. The correct address for your location can be found by contacting the VAT national advice line on 0845 010 9000.

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