Finding a mistake on a VAT return you have already sent can make your stomach drop. But it happens to careful business owners and experienced accountants alike. The good news is that HMRC has a clear process for putting things right, and many errors can simply be fixed on your next VAT return.
In this guide, we walk through the VAT mistakes we see most often, how to tell whether you can correct them yourself on your next return, and when you need to tell HMRC separately. HMRC's official guidance is in VAT Notice 700/45: how to correct VAT errors and make adjustments or claims, and we recommend keeping it to hand.
Why VAT errors happen
Most VAT errors are not about dishonesty. They come from busy people, messy paperwork and rules that are genuinely tricky. A receipt goes missing, an invoice is entered twice, or a supplier charges VAT at the wrong rate and nobody notices.
Since Making Tax Digital (MTD) for VAT, most VAT-registered businesses keep digital records and send returns through compatible software. That has cut out some manual slips, but software only works with the information you give it. If a transaction is coded wrongly, the return will be wrong too.
Mistakes are common. What matters most to HMRC is that you take reasonable care, and that you put things right promptly when you spot a problem.
The most common VAT return errors
Using the wrong VAT rate
Goods and services can be standard-rated, reduced-rated, zero-rated or exempt. Charging the standard rate on something that should be zero-rated, or the other way round, is one of the most frequent errors. It often happens with food, building work, energy-saving materials and mixed supplies.
Claiming VAT you are not entitled to
Some costs are blocked, which means you cannot reclaim the VAT even though you paid it. Common examples include business entertainment of clients and most car purchases where the car is available for private use. Claiming VAT on personal or non-business spending is another regular slip, especially for sole traders who use one bank account for everything.
Claiming without a valid VAT invoice
To reclaim input VAT (the VAT you pay on your business purchases), you normally need a valid VAT invoice. A till receipt, a bank statement line or an invoice from a supplier who is not VAT-registered is not enough. If you have claimed without the right evidence, you may need to reverse that claim.
Duplicate or missing entries
An invoice entered twice, a sale left out, or a credit note that was never recorded can all throw your figures off. These errors often show up when you reconcile your VAT account to your bank statements.
Putting a transaction in the wrong period
VAT is usually due based on the tax point, which is the date the law treats the supply as taking place. This is often the invoice date or the payment date, depending on your circumstances and any scheme you use. Recording a sale or purchase in the wrong quarter is a timing error, but it still needs correcting.
Reverse charge mistakes
Under the reverse charge, the customer rather than the supplier accounts for the VAT. It applies to some services bought from overseas and to certain construction services under the domestic reverse charge. Missing the reverse charge entirely, or recording it in the wrong boxes, is a common error for contractors and businesses that buy services from abroad.
Import VAT errors
If you import goods, you may use postponed VAT accounting, which lets you declare and reclaim import VAT on the same return. Forgetting to include these figures, or reclaiming import VAT without the right statement, can lead to errors.
Flat Rate Scheme slips
If you use the Flat Rate Scheme, you pay a fixed percentage of your VAT-inclusive turnover instead of working out VAT on each sale and purchase. Using the wrong percentage for your trade, or applying it to the wrong turnover figure, are the usual mistakes here.
Can you fix the error on your next return?
For many errors, yes. HMRC lets you correct past mistakes by adjusting your next VAT return, as long as certain conditions are met. The main ones are:
- The error was not deliberate. Genuine mistakes and careless slips can be corrected this way. Deliberate errors cannot.
- The error is within the time limit. You can generally correct errors from accounting periods that ended within the last four years.
- The net value is below the error correction threshold. HMRC sets a limit on the size of error you can correct on your return. It is based on either a fixed amount or a percentage of your net turnover (the Box 6 figure on the return where you make the correction), with an upper cap. Check the exact figures in VAT Notice 700/45, as they are what decides which route you take.
The net value means the total of all the errors you have found, with any VAT you underpaid set against any VAT you overpaid. So if you find several mistakes at once, you add them up and look at the overall result, not each error on its own.
Heads up - even if an error is below the threshold, you can choose to tell HMRC about it separately instead of adjusting your return. Some businesses prefer this for larger errors because it creates a clear record that the mistake was disclosed.
When you must tell HMRC separately
You cannot simply adjust your next return if:
- the net value of your errors is above the error correction threshold
- the error was deliberate
- the error relates to a period outside the time limit (in which case you usually cannot correct it at all, although HMRC may still pursue underpaid tax in some cases)
In these situations you report the error to HMRC directly. You can do this using form VAT652, or by writing to HMRC's VAT Error Correction Team with the details. You will need to explain what went wrong, which periods are affected, and how much VAT is involved.
| Situation | How to correct it |
|---|---|
| Genuine or careless error, net value below the threshold | Adjust your next VAT return (or tell HMRC separately if you prefer) |
| Net value above the threshold | Tell HMRC separately, for example using form VAT652 |
| Deliberate error | Tell HMRC separately - do not adjust your return |
| Error from a period outside the four-year limit | Usually cannot be corrected - take advice if HMRC may have lost tax |
| Error found before you submit the return | Simply fix it in your records and software before sending |
How to correct an error on your next return, step by step
- Work out what went wrong. Identify each error, the period it relates to and the amount of VAT involved.
- Calculate the net value. Add up the VAT you underdeclared and the VAT you overdeclared, then set one against the other.
- Check the conditions. Make sure the error was not deliberate, is within the time limit and is below the threshold.
- Make the adjustment in the right box. If you underdeclared output VAT (VAT on your sales), add it to Box 1. If you overclaimed input VAT, reduce Box 4. If you underclaimed input VAT, add it to Box 4. Make the adjustment in your next Excel sheet; it needs to be clear if HMRC audit you why the adjustment was made
- Keep a clear record. Note the error, the period, the amount and the correction in your VAT account. HMRC may ask to see this later.
You only adjust the VAT figures. You do not normally go back and change the net sales and purchases boxes for the earlier periods when using this method.
Penalties and interest: what to expect
This is often the part that worries people most, so let us be clear and calm about it.
HMRC can charge a penalty for an inaccurate VAT return if the error was careless or deliberate. If you took reasonable care and still made a mistake, there is usually no penalty. And where a penalty does apply, telling HMRC about the error yourself, before they find it, can reduce it significantly. So owning up promptly really does count in your favour.
HMRC may also charge interest on VAT that was paid late because of an error. Equally, if you overpaid, you may be able to get that money back. The rules on interest have changed in recent years, so check the current position in HMRC's guidance or with your accountant.
Heads up - if an error is large or you are unsure whether it counts as careless, it is worth speaking to an accountant before you correct it. How you disclose it can affect the outcome.
How to reduce VAT errors in future
- Reconcile regularly. Check your VAT account against your bank statements before every return, not just at year end.
- Keep business and personal spending apart. A separate business bank account makes it much easier to avoid claiming VAT on personal costs.
- Check invoices as they arrive. Look for a VAT number, the right rate and the right amounts before you record them.
- Set up your software carefully. Make sure VAT codes, reverse charge settings and any scheme you use are configured correctly.
- Review unusual items. Anything new, such as imports, building work or overseas services, deserves a second look.
- Keep good notes. A short note explaining any tricky decision will help you, your accountant and HMRC if questions come up later.
Putting it right with confidence
A VAT error is rarely a disaster. For most small businesses and sole traders, it is a matter of working out the net value, checking the conditions and adjusting your next return. Where an error is bigger, deliberate or you are unsure, telling HMRC separately is the safer route.
Whatever the situation, acting promptly and keeping clear records puts you in the best position. For the full rules, read VAT Notice 700/45 on GOV.UK. And if you would like help keeping your VAT records accurate and your MTD returns on track, we are here to help.