Revenue raises limit to self-correct VAT errors

HM Revenue & Customs has announced plans to let businesses correct their own errors of up to £10,000 on their VAT returns.

For the new VAT period, starting July 1 2008, the tax authority will raise the current £2,000 limit below which traders can currently amend their VAT mistakes by £8,000.

This means that if taxpayers discover an error of up to £10,000 on their previous VAT return, they can amend it on the next return, rather than make a separate disclosure to HMRC.

The ability to correct their own VAT returns has so far been the case for taxpayers, reminded chartered accountant Simon Dolan, but HMRC's decision to raise the threshold is new.

Errors spotted by the taxpayer of more than £10,000 can also be put right on the return for traders whose turnover for VAT purposes exceeds £1million, accountants say.

If turnover passes £1m then, under the changes, the limit is 1% of turnover up to a maximum of £50,000, with errors in excess of the new limits to be disclosed to HMRC as before.

However, tax expert Niki Ross Martin said that voluntary disclosures of VAT errors, as it was known traditionally, does not qualify as disclosure for the purposes of the penalty regime.

Under the regime, an unprompted disclosure of an error by the taxpayer, which was not made under fear of discovery, can result in the penalty for carelessness being reduced to zero.

"When an error is corrected on a VAT return," Ms Martin wrote on Accounting Web, "there is no requirement to notify HMRC."

"So a "voluntary disclosure" of a VAT error, will not meet the definition of a disclosure for new penalty purposes, and thus will not protect the trader in the event of a penalty being due."

She said that for this reason, HMRC are moving away from calling this "voluntary disclosure" and are now to call it the 'Error Correction Procedure.'

Separately, HMRC has announced changes to the VAT online registration facility, to reflect changes made to the paper registration in December 2006, to help reduce the number of errors when completing the return.

The changes, including every screen having a sub-heading advising that certain questions are mandatory, will hopefully reduce processing times for traders registering for VAT.

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