Unless you work for the tax office then everyone can make a mistake. If you make a mistake in calculating your VAT then there are two methods of making an amendment.
Method 1 is the simplest but can only be used for errors of a net value that do not exceed £10,000. It can also be used in certain circumstances for larger errors up to £50,000 but there are strict conditions which mean that it does not apply to the vast majority of traders. It cannot be used for any adjustment relating to a deliberate error. Method 2 is for any error for which Method 1 is not used.
If you can use method 1 then you simply adjust your VAT account and include the value of that adjustment on your current VAT return. Whilst this method is easy and straightforward there may be repercussions from using it. If the error was the result of careless conduct then the tax office may impose penalties, and the size of those penalties depends, amongst other factors, on whether you have made a disclosure. Correcting an error using Method 1 is not a disclosure for this purpose. Therefore, if you consider that the error may have been the result of careless conduct you may decide to use method 2 in order to gain the maximum reduction of the penalty.
You must use method 2 if:
- the net value of errors found on previous returns is between £10,000 and £50,000 and exceeds 1% of the box 6 (net outputs) VAT return declaration due for the current return period during which the error was discovered, or
- the net value of errors found on previous returns is greater than £50,000, or
- the errors on previous returns were made deliberately.
You may, if you wish, use this method for errors of any size which are below the limits at paragraph 4.3 above instead of a Method 1 error correction. If you use this method you must not make adjustment for the same errors on a later VAT return.
When notifying HMRC of an error correction you should use form VAT 652. This can be printed from their website at hmrc.gov.uk or your can request a form by contacting the VAT Helpline.
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If you are unable to obtain a form you should, by reference to business records in your possession, write to the appropriate office at paragraph 4.11 and provide full details of the errors including:
- how each error arose
- the VAT accounting period in which it occurred
- if it was an input tax or output error
- the VAT underdeclared or overdeclared in each VAT period
- how you calculated the VAT underdeclared or overdeclared
- whether any of the errors resulted in you paying us an amount that wasn’t due, and
- the total amount to be adjusted.
If the error was an amount underdeclared then you should include sufficient detail about the error on a separate sheet if necessary, to enable HMRC to decide whether they should charge interest. You can find further information about interest in Notice 700/43 Default interest.