| New Rules on Correcting VAT Errors |
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New rules are coming into effect concerning how errors in VAT Returns can be corrected. The new rules make it easier to correct mistakes in later VAT Returns without having to report these errors separately to HMRC.
Previously an error of up to £2,000 in the amount of VAT due could be corrected in the following Return. But for VAT periods commencing on or after 1 July 2008 the maximum error that can be corrected will rise to £10,000. For companies with turnover of over £1 million the maximum will rise to 1% of annualised VAT turnover, subject to a ceiling of £50,000.
The correction must be made in the next VAT Return following the discovery of the error. It will still be possible to report errors separately, and this may be worthwhile if the error is in the taxpayer's favour.
While this relaxation to the rules is welcome, it should also be borne in mind that making corrections via VAT Returns will leave the taxpayer vulnerable to HMRC's new penalty regime. The new regime introduces tough penalties for the underpayment of tax, with a maximum penalty of 100% of any tax due.
These tax-related penalties won't apply if the taxpayer has taken "reasonable care". But if HMRC decides an error was deliberate or caused by carelessness, any resulting penalty can be reduced if the taxpayer voluntarily disclosed the underpayment to HMRC. Correcting an underpayment of VAT via the next VAT Return will NOT count as a voluntary disclosure.
If you need any further advice on this issue please contact us on 0845 094 9470.
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