Previous rules

The previous rules for VAT registered businesses required corrections for VAT errors to be made on the next VAT return, so long as the net errors were up to £2,000 and no more; beyond this a voluntary disclosure had to be made by letter or by using form VAT 652. 

New rules

Under the new rules, effective for VAT returns starting on or after 1 July 2008, the limit above which a separate disclosure is required has been significantly increased. Taxpayers need now only make a voluntary disclosure (by letter or on form VAT 652) for the lower of:

• Net errors exceeding £10,000;

Or, for larger businesses,

• Net errors above £10,000, which are 1 per cent of the (Box 6) turnover figure or £50,000, whichever is the lower.

However, there are certain aspects of the adjustment/voluntary disclosure regime that must be noted:

• The adjustment date is the date the error is discovered, rather than the date it was made.
• The new limits only apply to ‘tax periods beginning on or after 1 July 2008’, so for those completing normal, quarterly returns, the first applicable return will be September 2008, October 2008 or November 2008 respectively.
• Default interest will continue to apply to voluntary disclosures, calculated from the time the error was made to the date the disclosure is received, but there will still be no penalties.

The changes mean that default interest will apply less often, as many more errors can now be adjusted through the appropriate return, the relevant VAT being accepted as correct tax for that period.

Although these long-overdue changes are most welcome, taxpayers should still ensure each return is carefully reviewed and voluntary disclosures made where applicable. Additional care should be taken in the transitional period to make sure whether specific errors discovered fall under the old or new limits.

Useful HMRC links

• Notice 700/45 How to correct VAT errors and make adjustments or claimsUse this notice to find out about VAT error corrections and making adjustments or claims.
• What to do if you find a mistake on an earlier VAT returnUse this guide to find out how to deal with errors you discover on VAT returns you’ve already filed.
• Paying interest on late or undeclared VAT paymentsUse this guide to find out when and how you might be charged interest for late VAT payments.
• Penalties for mistakes and delays with your VATUse this guide to find out what penalties you could be liable to pay for mistakes with your VAT.

Barnes Roffe Topical Tips:

• Ensure you correct any errors when discovered – letting them build up is not only against the rules, but it will risk your cumulative net error being greater than the threshold and you will be required to make a separate disclosure.
• Errors commonly occur from the claiming of VAT on items with no supporting documentation or documentation being in the name of a director instead of the company – ensure you have the correct paperwork to support your claim.
• Common errors also occur by the expenditure being covered by specific rules. For example if you lease motor vehicles which are used by staff for with an element of private use (home to work travel) then you can only reclaim 50% of the VAT back; or, you cannot claim VAT on entertaining costs, etc.