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VAT errors on returns submitted more than four years ago are out of time and cannot be corrected, which is a relief when HMRC cannot go back to claim underpaid tax. For instance, errors on a return for the period ending 31 December 2018 can only be corrected up to and including the return for the period ending 31 December 2022.
Any errors less than £10,000 can be corrected on the following VAT returns. But for any underpayments, HMRC may find the client’s behavior as “careless” in completing the return. If the behavior is considered careless, the underpaid VAT is included on the next return, and additionally, send HMRC Form VAT 652 (see Follow up) for the corrected error(s). This is called the full disclosure; a 30% penalty for careless error can be reduced to zero for voluntary disclosure.
The limit is less than £50,000 and 1% of the return’s Box 6 outputs figure for businesses with more significant turnover. If the errors do not qualify for both conditions, underpayments must be notified to HMRC on Form VAT652. If errors exceed the correction limitations, HMRC online system can be used to send relevant information, including a spreadsheet containing computations, a copy of sales or purchase invoices, or a letter outlining the error can be attached (s). If it cannot be done online, a separate form can be completed online, printed off, and sent to HMRC via email at btcnevaterrorcorrection@hmrc.gov.uk.
When notifying HMRC of a VAT adjustment or error, interest can be charged, but you can include “code 1” on the tax correction form to avoid an interest charge if the corrections do not result in a loss of revenue for HM Treasury. Usually, VAT adjustments are carried out annually, and these adjustments are not classed as errors and are never declared on FormVAT652 but always on VAT returns. All partly exempt businesses must carry out an annual input tax adjustment.