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How to correct VAT errors and make adjustments

Engage an accountancy firm to avoid VAT errors and penalties

Value Added Tax – or VAT – is a significant consideration for the majority of UK businesses (though there are certain exemptions).

Businesses with a taxable turnover above the VAT registration threshold (currently £85,000, June 2023) are obliged to register for VAT. They are then required to charge VAT on the sale of goods or services.

Companies that are VAT-registered must regularly file a VAT return with HMRC. The Return shows the VAT charged on sales to customers, as well as the VAT paid on any purchases made by the company during the reporting period. The difference between the two figures will determine how much VAT is owed to HMRC (or, if the company paid more VAT than it charged, HMRC might refund the company).

In this article, we will look at:

  • VAT errors and related penalties
  • how to correct VAT errors and make adjustments
  • the benefits of specialist VAT services for this complex tax

What happens if you make a VAT error?

The consequences of a VAT error will vary, depending on the circumstances and severity of the error.

Using a reputable accountancy firm will – of course – minimise the risk of making a mistake in the first place. However, if you have taken care of matters yourself then a tax professional can help to rectify VAT errors and minimise any potential negative impact.

What is the penalty for charging VAT when not registered?

If your company is not VAT-registered then you must not charge VAT on goods or services. A penalty will be payable by anyone who issues an invoice showing VAT when they are not VAT-registered.

The Finance Act 2008 states that the penalty for charging VAT when not registered can be up to 100% of the VAT shown on the invoice.

If there is an unprompted disclosure to HMRC – i.e. you realise that charging VAT was a careless mistake – the minimum penalty is 10% of the VAT. You should also issue a credit note and a refund to the customer for the VAT amount. It is important to let them know that they should correct their own VAT account, to reflect the tax you have mistakenly charged.

What is the penalty for late payment of VAT?

For VAT accounting periods starting on or after 1st January 2023, there are new penalty systems for:

  • VAT returns that are submitted late
  • VAT liabilities which are paid late

To understand how the new late VAT payment penalty system works, please visit the government website.

What if you can’t afford to pay VAT liabilities?

If you simply cannot pay your VAT liabilities, you should file your VAT return on time and then contact HMRC with the hope of negotiating a payment plan.

You may be permitted to pay in instalments. If this is the case, the standard interest charges on late payments are frozen and will not be enforced if you adhere to the terms of the payment agreement.

As well as charging penalties and interest, HMRC can take legal action against your business which could result in a County Court Judgment (CCJ).

What is the penalty for VAT evasion

Deliberate and dishonest conduct regarding VAT is considered to be a fraudulent act. These matters – namely evading VAT payment or charging VAT that you are not entitled to – are likely to result in the most severe fines and penalties.

So what is the penalty for VAT evasion? Since VAT fraud is not taken lightly by the police, HMRC or the courts, you could face the following:

  • A sentence of a maximum of 7 years
  • A fine of up to £20,000
  • Ancillary orders
  • Payment of costs, applied for by the prosecutors
  • Victims surcharges

The severity of the penalty is based on how you defrauded HMRC and how culpable you are determined to be.

How to correct VAT errors and make adjustments

If minor or genuine errors are discovered, businesses are obliged to rectify them. For example, by filing an amended VAT return or making adjustments in subsequent returns.

If you deliberately opt to submit or leave an under-declaration of VAT, you could be liable to a penalty, fine or criminal prosecution.

5 benefits of engaging a VAT expert

Here at Hartley Fowler, our knowledgeable team can offer a wealth of support with a range of VAT-related services. With our assistance, your company will benefit from:

  1. Compliance
    We share our knowledge and in-depth understanding of current VAT regulations to ensure compliance with all statutory requirements. As mentioned, there is the potential for stressful and costly repercussions if your affairs are not compliant and you make VAT errors.
  2. Time to focus on business
    When you engage an accountancy firm to take care of your VAT-related needs, it gives you back more time to concentrate on your business’s core operations. Entrusting VAT to a professional expert means that your company will be running more efficiently and productively.
  3. VAT planning
    Strategic VAT planning is vital for businesses. Outsourcing your VAT planning to an accountancy firm will enable you to benefit from tailored VAT strategies based on the specific needs and goals of the business. Proactive VAT planning can optimise cash flow and reduce tax liability.
  4. Hassle-free VAT returns
    Complex and time-consuming VAT returns can be avoided by outsourcing to a reputable accountancy firm. We will handle VAT returns efficiently and accurately to save you time and effort and avoid late penalties.
  5. Audit support
    If you are unexpectedly required to complete a VAT audit, it could be stressful and laborious. We can provide invaluable support during the audit, minimising disruption and advocating for your company.

From the essentials – like registering your business for VAT and submitting a return – to more complex matters, such as strategies or contentious VAT assessments, our team can provide invaluable support.

Avoid VAT errors and save time

As discussed, there are many advantages to using a specialist accountancy firm for VAT services. From expertise with compliance and knowing how to correct VAT errors and make adjustments to providing financial insight, we’ve got you covered.

Take the next step and contact our friendly team of VAT specialists who will be able to offer tailored advice for you. Call your nearest Hartley Fowler office today on:

Wimbledon office: 020 8946 1212
Brighton office: 01273 202311