New rules on disclosing VAT errors

25 July 2008

For many years, taxpayers discovering net errors on previous returns have only been allowed to make an adjustment to the VAT return for the period in which they discover them if the net errors were up to £2,000.

However, there is now good news, particularly for smaller businesses, in that for errors discovered on VAT returns starting on or after 1 July 2008 the limits above which a separate disclosure is required have been significantly increased.

From that date, taxpayers need only make a voluntary disclosure (by letter or on Form VAT 652) for: net errors exceeding £10,000; or, for larger businesses, net errors above £10,000, which are 1 per cent or the Box 6 turnover figure or £50,000, whichever is the lower.

There are certain aspects of the adjustment/voluntary disclosure regime worthy of note. Firstly, the trigger is the date the error is discovered, rather than the date it was made. Secondly, 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 09/08, 10/08 or 11/08 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 liability to penalties.

In effect, 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.