Accounting and reporting for Value Added Tax (VAT) can be an overly complex area for small businesses particularly when there are cross-border transactions involved. But taxpayers are legally obliged to submit accurate VAT returns whether filed monthly or quarterly. The VAT rules provide for two alternative ways of correcting VAT errors should the taxpayer discover VAT errors after submitting the VAT returns. As the HMRC may impose penalties if VAT errors are discovered by them it is always advisable that the taxpayers themselves declare the errors using one of the methods discussed below. That is, however, not to suggest that deliberate errors would escape penalty and prosecution.
Where incorrect entries have been made in the VAT records and VAT return has not been submitted it is fairly straight forward: you can correct the errors by amending the entries made in the records. However, the problem arises where you have discovered an error after you have submitted the VAT return.
VAT errors should not be confused with VAT adjustments which may arise as a result of bad debt relief, partial exemptions, credit notes etc.
There are basically two methods to deal with VAT errors based on the monetary thresholds.
Method 1: Under this method the net value of the VAT errors discovered for a previous VAT return are corrected in the current VAT return. This method can only be used in the following circumstances:
a) Where the net value of the errors does not exceed £10,000, or
b) Where the net value does exceed £10,000 but does not exceed £50,000 AND it does not exceed 1% of the net value of the output (sales turnover – box 6) for the VAT return period to which the errors pertain to.
Net value of errors means the net VAT impact of the errors being the difference between VAT owed to and due from the HMRC.
Method 2: Under this method the details of VAT errors are reported to the HMRC using a prescribed form (VAT652). This method must always be used in the following circumstances:
a) Where deliberate errors were made
b) Where the net value of the errors exceeds £50,000 or
c) Where the net value of the errors is between £10,000 and £50,000 but exceed 1% of the net output (box 6)
This method may also be used voluntarily for reporting all VAT errors by the taxpayer.
VAT errors should be corrected as soon as discovered and can be corrected up to the last four years.
