VAT ERRORS - 07.07.2020

Avoiding an interest charge for past errors

You have discovered that your business has made supplies of management services for the last five years to an associated company but didn’t charge VAT. How do you correct this problem, and can you avoid an interest charge on the underpaid VAT?

Error correction period

If an error relates to a VAT return when the period ended more than four years ago, you don’t need to worry about these returns, as any errors are out of time and can be ignored. So, for example, if an error was discovered on 10 July 2020, you can ignore VAT returns up to and including 30 June 2016.

Trap. If an underpayment of VAT relates to deliberate actions, i.e. fraud, HMRC has the power to assess VAT going back up to 20 years.

Notifying HMRC

In this example, we will assume that the total amount of underpaid output tax in the last four years exceeds both £10,000 and 1% of the Box 6 outputs figure that will be entered on your next VAT return. The 1% test is not appropriate anyway if the underpaid tax exceeds £50,000. This means that you must notify your underpayment in writing to HMRC, usually by submitting FormVAT652 , giving full details about the errors that have been made.

Tip.Form VAT652 is completed online but must be printed out and posted to HMRC (see The next step ).

Trap. If you notify HMRC without using the VAT652 procedure that is fine. But make sure you include all of the details that would be entered on the VAT652 to ensure the assessment that will be raised by HMRC is not delayed.

Interest

Despite low national interest rates, HMRC charges an annual rate of 2.75% on errors causing underpaid VAT on a past return. The charge is based on the time period between when the VAT should have been paid and the date when an assessment is raised by HMRC to correct the errors. The interest period is capped at three years. However, if you can show that HMRC has not been out of pocket as a result of your error, i.e. the output tax you did not charge would have been claimed as input tax by the recipient, then the interest charge will be waived.

Example. ABC Ltd provided management services to DEF Ltd and has not charged VAT on fees for the last two years. The VAT underpaid is £60,000. As long as DEF Ltd is both VAT registered and trades as a business that can fully reclaim input tax, then ABC can ask HMRC to not charge interest.

Tip. This principle is known as “commercial restitution”, i.e. HMRC has not lost any tax as a result of the errors. The interest is waived by ticking a box on Form VAT652 .

Input tax for recipient

Although the supplier has underpaid output tax in our example, the recipient of the management services has not underclaimed input tax on any past VAT returns because it has not held a proper tax invoice from the supplier to support a valid claim. The supplier must therefore issue a VAT only invoice covering supplies made in the previous four years. The invoice will have a current date, which the recipient can claim on their next VAT return submitted to HMRC.

For a link to Form VAT652, visit http://tipsandadvice-vat.co.uk/download (VA 10.09.04).

Errors made more than four years ago are out of time and can be ignored. Additionally, if you can show HMRC that there has been no net loss of tax caused by your underpayments, then any interest charge will be waived. Make this claim for commercial restitution by ticking the appropriate box on Form VAT652.


The next step


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