October 29th, 2012 / Insight posted in

Avoid penalties on VAT errors

PK writes: My company omitted to include some cash income for two recent quarters in its VAT return. Cash income is unusual for the business, which is why I think it was missed. I am concerned about how we report this to HM Revenue & Customs (HMRC), as I would prefer not to open up the company to inspection and the possibility of costly penalties.

Many businesses are not aware that the limits for self correction of errors changed in 2008, writes Adrian Houstoun, VAT partner at Kingston Smith LLP. From 1st July 2008 the existing £2,000 limit was extended to £10,000 or 1% of turnover, with a maximum limit of £50,000. Therefore, businesses with a turnover of up to £1m can self correct where the total value of the error is no more than £10,000, while businesses with a turnover exceeding £5m have a £50,000 limit. Where a company’s turnover is between £1m and £5m the limit will be 1% of turnover.

Up to these limits, VAT errors can be adjusted in the next VAT return due. Above these limits, VAT errors should be notified separately to HMRC as soon as you are aware of them. This may be done by using VAT form 652, available from HMRC’s website, or by letter. Sending a letter is usually the best approach as it will allow you to provide full details of your circumstances.

There is a new penalty regime that distinguishes between innocent administrative errors, deliberate unconcealed errors, and deliberate concealed errors. As a result, many large businesses that have regular timing corrections, as well as errors, tend to notify HMRC even if they do not exceed the limit. This avoids the risk of the error being discovered in a VAT inspection when HMRC may apply higher penalties. Therefore, if you have discovered an error you ought to take advice as to whether to disclose it or not. It may increase the likelihood of an inspection, but will reduce the chance of a significant penalty.