Given the period of significant transition for independent schools, it is important that any errors in previously submitted VAT returns are identified and corrected promptly. Here, we outline the steps schools should take to correct VAT errors and explain the updated HMRC disclosure process.
When to disclose VAT errors to HMRC
Where a school identifies an error in a previously submitted VAT return, this may result in:
- an underpayment or overpayment of output tax; or
- an over-recovery or under-recovery of input tax.
Once an error has been identified, its value should be quantified to determine how it should be corrected.
Where the net value of the VAT error (taking both output tax and input tax into account) falls within certain thresholds, the adjustment can be made on a subsequent VAT return. These thresholds are as follows:
- Less than £10,000; or
- Between £10,000 and £50,000, provided the error is less than 1% of box six
(based on the box 6 figure for the VAT return period in which the error is discovered).
Although a formal disclosure is not strictly required where errors fall within the above thresholds, schools may still choose to disclose the error to HMRC as a matter of transparency.
Doing so may help mitigate any penalties HMRC might otherwise charge.
HMRC has also updated its guidance to include a useful online calculator to help determine whether full disclosure is required. This can be accessed here.
VAT errors falling outside the thresholds above must be disclosed to HMRC.
How to disclose VAT errors to HMRC
Previously, VAT errors were disclosed by submitting a VAT652 error correction form. This was a cumbersome online form that could not be saved and had to be completed in one sitting.
The VAT652 paper form has now been replaced by an online disclosure portal accessible via the Government Gateway. This can be found here.
Once logged in, the form requires additional information about the nature of the error(s), such as whether they relate to output tax or input tax. The form can be saved for up to seven days, allowing schools to return to it if needed. Upon submission, a copy of the completed form can be downloaded and retained for records.
Penalties for inaccuracies
The penalty range that is charged by HMRC is dependent on the whether the error is careless or deliberate.
| Nature of the VAT error | Typical percentage of VAT error applied |
| Careless error | 0 – 30% |
| Deliberate error | 30 – 70% |
| Deliberate and Concealed | 70 – 100% |
Where HMRC identifies a careless error, the penalty applied is typically between 10% and 30%, depending on the circumstances and the level of cooperation with HMRC.
Summary
Where errors are identified in previously submitted VAT returns, it is important that these are quantified and disclosed to HMRC in a timely manner. Early and transparent disclosure can help reduce exposure to penalties and interest.
For further information on any of the points discussed in this article, or for assistance with reviewing or correcting VAT returns, please contact your usual Crowe contact.
