Contractors' Questions: How to own up to my VAT error?

Contractor’s Question: My Plan B company omitted some cash income for two recent quarters in its VAT return. Cash income is unusual for the business, which is why I think it was missed. I am concerned about how I should report this to HM Revenue & Customs, as I would prefer not to open up the firm to inspection and the possibility of costly penalties.

Expert’s Answer: Many businesses are not aware that the limits for self-correction of errors changed in 2008.

From July 1st, 2008, the existing £2,000 limit was extended to £10,000 or 1% of turnover, with a maximum limit of £50,000. Therefore, businesses with a turnover of up to £1m can self-correct where the total value of the error is no more than £10,000, while businesses with a turnover exceeding £5m have a £50,000 limit.

Up to these limits, VAT errors can be adjusted in the next VAT return due. Above these limits, VAT errors should be notified to HMRC as soon as you are aware of them. This may be done by using VAT form 652, available from HMRC’s website, or by letter. Sending a letter is usually best because it will allow you to provide full details.

A new penalty regime distinguished between innocent administrative errors, deliberate unconcealed errors and deliberate concealed errors. As a result, many large businesses that have regular errors notify HMRC even if they do not exceed the limit. This avoids the risk of the error being discovered in a VAT inspection when HMRC may apply higher penalties. So, if you have discovered an error you ought to think about disclosing it to the taxman. This may increase the likelihood of an inspection, but will reduce the chance of a big penalty.

The expert was Adrian Houstoun, VAT partner at chartered accountancy firm Kingston Smith LLP.

Monday 1st Nov 2010