​

​

​

Introduction

​

​

​

Whilst VAT errors will occur in most businesses from time to time, it should be a key priority  of a business to ensure there are robust controls within its VAT reporting process to minimise and mitigate against such errors.

​

Failure to do so, can result in repetitive errors and the need to submit Error Correction Notices (ECN's) to HMRC which can result in penalties and cause reputational damage to the business. 

​

Examples of such errors can range from:

​

• The amount of VAT payable or receivable being recorded incorrectly within the accounting system

• Incorrect amounts of output VAT paid or Input VAT recovered from HMRC on previous returns

• Failure to keep up to date with Legislative changes and as such incorrect VAT rates or treatments applied to transactions 

​

VAT Errors can be broken down in to two categories:

​

Errors Made in the Current VAT Return period

​

These are errors made and discovered within the current VAT reporting period prior to submitting the current quarters VAT return. 

​

For such errors, corrections should be made within the systems in the same period to ensure the correct VAT is reported on the VAT return sent to HMRC. 

​

​

Errors Discovered that Relate to Prior VAT Return Periods up to 4 Years old

​

Errors found up to four years old from the return period of discovery can be corrected using one of the two methods detailed below depending on the value of the error. 

​

​

​

 Methods for Correcting Errors 

​

​

​

Method (1) 

​

Using method 1, corrections for errors on past returns can be made on the current quarters returns provided the net value (box 1 / box 4) of the errors does not exceed:

​

• £10,000

• Between £10,000 and £50,000 but does not exceed 1% of the box 6 figure on the current period return.

​

​

Where errors do not meet the above conditions, then method 2 must be used.

​

Note: Method 2 must be used where it is discovered that the error was deliberately made.

​

​

Method (2)

​

​

​

Method 2 must be used where the net value of the errors:

​​

• Is between £10,000 and £50,000 but greater than 1% of the box 6 figure of the current quarters VAT returns 

• Is greater than £50,000

• Errors on previous returns were made deliberately

​

​

To use method 2, a business must make an Error Correction Notice by completing form VAT652

​

Note:  Businesses can use Method 2 even where the net value of errors does not exceed £10,000 or are between £10,000 and £50,000 but not greater than 1%

​

​

​

Output VAT 

​

​

Output VAT will either be over declared or under declared in previous VAT returns and thus a payment will either be due or a refund from HMRC following submission of a Error Correction Notice (ECN).

​

Input VAT

​

​

Input VAT will either be over or under recovered on previous VAT returns and thus a payment will either be due or a refund due from HMRC following submission of an Error Correction Notice (ECN). 

​

Note:  If an invoice was received from a supplier with VAT in a previous VAT return period but the VAT was not recovered in that period, then the input VAT will need to be recovered via Error Correction Notice

​

and not included in the next return. 

​

​

​

Time Limits  for Making 

 

​

The time limit for correcting errors is 4 years from the period the error was discovered.  So for errors discovered in April 2022, corrections can be made for periods going back to April 2018.

​

​

​

Adjustments That are Not Errors

​

​

​

There are a number adjustments that are part of the normal accounting and VAT reporting process and are not errors as described above and examples are listed below:

 

• Issue of debit and credit notes

• Capital Good Scheme Adjustments

• Partial Exemption Adjustments

• Bad Debt Relief Adjustments

​

​

​

​

Protective Claims

​

​

​

There is also the facility for businesses to submit Protective Claims to HMRC where there is a potential over payment of Output VAT or under recovery of Input VAT but there is a risk that Error Correction Notices will not be submitted by the business on time to prevent the claims going outside the 4 year time limit cap. 

​

Protective claims will often be submitted to HMRC where:

​

• The business is still in the process of collating the information required to submit an ECN to recover VAT from HMRC.

• There are differences of opinion on specific treatments for VAT and the business is discussing or challenging HMRC's position.

• There are collective industry claims or challenges at VAT Tribunals or in the courts and the outcomes are not imminent 

• There are ongoing competitor claims or challenges against HMRC positions in the UK courts.  

​

​

​

 

​

​

​

​

​

​

​

-Contains public sector information licensed under the Open Government Licence v3.0.

​

​

​​