HMRC Publication on Error Correction

 

Notice 700 (April 2002), para. 19.11 covers this area.

 

Example 1

 

Joe prepares calender quarterly VAT returns. Last June he discovered the following errors on his earlier returns:-

 

 

Error

 

£

 

Output tax understated on scrap sales

2,500

 

Output tax overstated on supply to China

(900)

 

Input tax understated on monthly lease charges

(200)

 

Input tax disallowed on entertaining

110

 

Duplicated input tax claim

300

 

Net difference

1,810

 

 

 

 

Joe can correct all these errors on his return to the end of June, because the net difference is only £1,810, which is not more than the £2,000 limit, by showing a £1,600 positive entry in the tax payable portion of his VAT account and a £210 negative entry in the tax allowable portion of his VAT account.

 

 

Input Tax (£)

 

Output Tax (£)

 

Total (£)

 

Underdeclaration of liability

 

Output tax understated

2,500

 

2,500

 

Input tax overstated

(110)

 

 

110

 

Input tax overstated

(300)

 

 

300

 

Total underdeclarations

2,910

 

Overdeclaration of liability

 

Output tax overstated

(900)

 

900

 

Input tax understated

200

 

 

200

 

Total overdeclarations

1,100

 

Difference (under the limit)

1,810

 

Entry: (negative)/positive

(210)

 

(1,600)

 

 

 

 

If he had not made the £200 error ‘(3)’ the net difference would have been £2,010, which exceeds the limit and so he could not have adjusted his VAT account. He would have to make a voluntary disclosure as described below.

 

If the real input tax for the period to the end of June was £5,410 then he enters £5,200 (being £5,410 less £210) in the tax allowable portion for the period.

 

If the real output tax for the period to the end of June was £7,000 then he enters £8,600 (being £7,000 plus £1,600) in the tax payable portion for the period.

 

Example 2

 

A year ago Ann omitted from her VAT return the £950 output tax relating to one supply of standard-rated goods, in respect of which she issued a VAT invoice and was paid in cash at the time. In the last quarter she included the VAT invoice with the batch of those for that quarter and showed the £950 output tax on the list of output tax amounts for the return for that quarter. She made no other entries in her records of disclosure.

 

HMRC may argue that she has not made a voluntary disclosure or a valid correction. Thus she should not have included the £950 on the tax payable portion of the return because:-

 

    • The adjustment should have been shown separately in her VAT account as a positive entry in the tax payable portion (reg. 34(4)(b)):

 

    • It should have referred to the return to which it related; and

 

    • It should have referred to the appropriate documentation, i.e. the VAT invoice

 

 

If she does not have a reasonable excuse for the error, it and certain other errors may enable HMRC to issue a misdeclaration penalty if the limits are exceeded.

 

For more information and help with your HMRC tax investigation, call KinsellaTax NOW on 0800 471 4546.

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