Under Making Tax Digital you cannot amend a VAT return once it has been submitted. When you find a mistake on a past return, the error is corrected either on a later return or by a separate notification to HMRC. Which route you may use depends on the size of the net error, whether it was deliberate, and how long ago it happened. HMRC’s rules are in VAT Notice 700/45; this page turns them into the steps a bookkeeper actually takes.
Step 1: add up the net error
Collect every error you have found on previous returns that you have not yet corrected. For each, work out the VAT effect: output VAT under-declared or input VAT over-claimed is owed to HMRC; the reverse is owed to you. The net value is the difference between the total owed to HMRC and the total owed to you.
Large errors in opposite directions can cancel out to a small net value, and the threshold is then tested on that net figure. Each careless or deliberate error inside it still counts on its own for penalty purposes.
Step 2: apply the threshold
Notice 700/45 calls the two routes method 1 (adjust your current return) and method 2 (notify HMRC separately).
| Net value of the errors | Correction route |
|---|---|
| £10,000 or less | Method 1 allowed |
| Over £10,000 and up to £50,000, and no more than 1% of the box 6 figure on the return for the period in which you found the errors | Method 1 allowed |
| Over £10,000 and over 1% of that box 6 figure | Method 2 required |
| Over £50,000 | Method 2 required |
| Any amount, if the errors were deliberate | Method 2 required |
The 1% test uses box 6 of the current return, the one for the period in which you discover the errors, not the return that was wrong. You can always choose method 2 for errors below the threshold.
Example. A wholesaler finds that £18,000 of output VAT was under-declared over three earlier quarters. On the return for the quarter in which the error is discovered, box 6 is £2,400,000; 1% is £24,000, so the £18,000 can go on that return under method 1. Had box 6 been £900,000, 1% would be £9,000, the error would exceed both £10,000 and 1%, and method 2 would apply.
Step 3: check the time limit
Errors can generally be corrected for four years: from the end of the VAT period concerned for output tax and over-claimed input tax, and from the due date of the return for input tax you under-claimed. An under-claim older than that is lost. The four-year limit does not apply to deliberate errors.
Careless, deliberate or neither
HMRC distinguishes errors by behaviour, and penalties follow from it:
- Despite reasonable care: no penalty, for example a supplier invoice that looked valid but was not.
- Careless: a failure to take reasonable care, such as using the wrong VAT code on a recurring purchase for months.
- Deliberate: knowingly getting the return wrong, with or without concealment.
Correcting a careless error through method 1 is not a disclosure for the penalty rules. To get the largest penalty reduction for a careless error, tell HMRC separately as well, in writing or through the error notification route. Deliberate errors must always be notified under method 2. Late payment interest can apply to VAT that was paid late because of the error. The penalty ranges themselves are explained in VAT penalties.
Making a method 2 notification
HMRC no longer accepts the old paper form VAT652. Report the errors using HMRC’s online error reporting service, or write to HMRC’s VAT Error Correction Team quoting your VAT registration number. Either way, HMRC needs how each error arose, the VAT period in which it occurred, whether it concerns input or output tax, the VAT under- or over-declared in each period and how you worked it out, and the total to be adjusted. HMRC then issues a notice of the amount due, with any interest.
Do not also adjust a later return for errors notified under method 2, or the VAT is counted twice.
Correcting the books
The VAT return comes from your accounting records, so the correction starts there.
Method 1. Post the correcting entry in the current period with a VAT code that feeds the return boxes, so that the adjustment flows into the submitted figures through your MTD software and not as a hand-typed override. For the wholesaler above, that might be a journal crediting the VAT control account £18,000 and debiting the account that should have borne the VAT, typically the customer debtor if the VAT will be invoiced, or sales if it is absorbed. Reference the original periods in the narrative.
Method 2. Post the same correction, but with a code that keeps it out of the return boxes, for example to a separate VAT errors notified liability. Clear that account when HMRC’s assessment is paid. This keeps the VAT control account reconciliation explaining every pound of difference between the ledger and the returns.
If the error also misstated profit in a year whose accounts are already finalised, post the profit effect in the current year unless it is material enough to need a prior period adjustment; discuss that with whoever prepares the accounts. General principles for fixing ledger postings are in correcting journals and reclassifications.
Records to keep
Notice 700/45 asks you to record each error in your VAT records as soon as you find it. A simple error record per return should show:
- the date the error was found;
- the period in which it occurred;
- whether it concerns output or input tax, and the amount;
- the documents behind it and the journal that corrected it;
- the method used and, for method 2, the date of notification and HMRC’s reference.
A running VAT error log makes the net-value calculation in step 1 a two-minute job and shows HMRC that the business takes care.
If your current software only lets you correct VAT by typing over box totals, look for VAT software where the correcting journal carries through to the next return.