By Hydeam Sulton, Tax Partner & Head of VAT, Armstrong Watson LLP

IT is inevitable with the number of transactions taking place within a business that some VAT errors will occur. It would be reasonable to suggest, that if you identify these without HMRC intervention, it shows that your control procedures are working as intended. Once an error is identified, however, to minimise the chance of penalties being applied, it is essential you manage it correctly.

The action you need to take depends on the size and nature of the error. The discrepancy can be included on your next VAT return as long as the net value of the adjustment doesn’t exceed the greater of: £10,000 or one per cent of the box six figure on the VAT return (broadly VAT exclusive sales) for the period of discovery, subject to an upper limit of £50,000.

If these limits are breached, then a separate disclosure is required. Where you have underpaid VAT, sometimes it can be advisable to disclose smaller errors to meet the “telling” requirement under the VAT penalty regime. This would usually be suggested in cases where you are concerned about what HMRC’s attitude towards the transactions could be, as it can help reduce possible penalties.

Making a VAT Error disclosure

Normally a disclosure is made using form VAT 652, although a letter or report can also be appropriate, and HMRC has just introduced an online version of this form too. This allows all details to be completed and submitted electronically via your government gateway. A printable version of the VAT652 remains available for taxpayers who prefer this route. Although simplifying modes of communication with HMRC is always to be welcomed, when something is completed online, it can be easy to rush through the submission process. This is one area where you must not do this.

Explain how the VAT error arose

In addition to correctly quantifying the error, one of the most important parts of the disclosure is how you explain why it arose. You want to provide reassurance to HMRC that this was an isolated incident and that your general VAT systems are fundamentally sound. Once a disclosure is made, HMRC might accept it as it stands, or open an enquiry. The enquiry could be into the disclosure in isolation or may result in a wider VAT inspection. For this reason, it is recommended that you review all areas of your VAT accounting in advance of disclosure in case there are other issues which could be uncovered by an HMRC visit.

To discuss it further, phone 0808 144 5575 or email