Correcting errors and the new penalties – how they interact
I’ve been looking at the new rules that came into affect concerning the correction of errors made on past VAT returns. Under the new rules you can correct an error made on past VAT returns provided the net error is not more than £10,000. The rules are a little more complex than that because they allow businesses with a turnover of more than £1,000,000 to correct errors in this way where the error is not more than 1% of their turnover up to a maximum of £50,000. For most businesses, however, the £10,000 limit will suffice.
This is good news for businesses as there is no longer a need to submit a ‘voluntary disclosure’ to HMRC for errors over £2,000, provided they aren’t more than £10,000! It should also be good news for HMRC as their own statistics on voluntary disclosures showed that 80% of voluntary disclosures were in the range up to £10,000. This, in theory, should free up resources within HMRC.
There is a fly in the ointment, however, in the new penalties that come into effect for returns that are due to be submitted to HMRC after 31 March 2009. Under those rules you’ll be required to make a disclosure to HMRC of any errors you make if you want to avoid a penalty. HMRC say that if you have taken reasonable care and still make a mistake, you can correct that by making an adjustment on your VAT return.
If, however, the mistake you are correcting is considered to be the result of carelessness on your part, an unprompted disclosure has to be sent to HMRC. This will help to mitigate the penalty. This means that if you correct an error on a VAT return because you believe you took reasonable care in preparing your past returns, but HMRC look at it later and decide that you were careless it doesn’t count as an unprompted disclosure so you become liable to a penalty.
How do you avoid or minimise a penalty? You make an unprompted disclosure to HMRC. Even if you believe you have taken reasonable care. Why? Because it will save you having to fight an issue should HMRC visit you three and a half years after you made the correction and then suggest you did not take reasonable care. Did I mention that HMRC are extending the time in which they can assess you, and you can recover any overpaid tax, from three years to four years for VAT?
If you want to find out more about the penalty régime HMRC have put up some useful pages on their website. You can find them by using this link.
Rebecca Benneyworth has written a series of very clear articles on AccountingWeb on the new penalties.
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