Several months ago your bookkeeper charged the incorrect rate of VAT on an invoice which meant the customer was undercharged. Can you now issue an extra invoice to correct the VAT error or must you swallow the extra VAT cost?

VAT liability

Mistakes happen and tax is no exception. In fact, HMRC has a dedicated regime for dealing with the consequences. The trouble is that VAT is unique in that it potentially affects the customer who was charged the wrong amount of VAT as well as the business which charged it. HMRC’s approach is clear and well established. If you fail to charge or charge the wrong amount of VAT, you’re liable for any shortfall. Whether you have any recourse to recover the cost from your customer is a separate matter. Regardless of this your first step is to correct your mistake.

Tip. If you discover an error more than four years after the end of the VAT return period in which it was made you can usually ignore it. This applies for errors resulting in over or underpayments of VAT.

Corrective procedure

If the total VAT (ins and outs) for all errors is no more than £10,000, or less than £50,000 and 1% of the outputs figure (Box 6 on the VAT return), you can make the correction by including an adjustment to the corresponding figures on your next VAT return. If the amount is greater, you must notify HMRC in writing. The best way of doing this is to complete Form VAT652.

Tip. It’s important to notify HMRC of errors, regardless of the amount involved (apart from small amounts, say up to £500) if you think they occurred because of carelessness. This can help mitigate any HMRC penalty. You can still make the correction by adjusting your next VAT return but you also send a FormVAT652, and indicate in the box provided that you have “adjusted in VAT return”.

How much VAT?

If an error results in insufficient VAT charged, working out the amount of adjustment for your next VAT return isn’t as simple as you may think.

Example. A year ago, soon after registration, Acom Ltd failed to charge VAT on a batch of invoices with a total value of £10,000 to which the standard rate (20%) applied. The VAT that needs to be accounted for to HMRC is not £2,000 (£10,000 x 20%) but £1,333 (£8,333 x 20%) because HMRC works on the principle that the amount Acom invoiced included the correct VAT amount. The trouble is that payment of the £1,333 VAT still comes out of Acom’s pocket.

An alternative solution

The price you give your customers must state if it’s inclusive or exclusive of VAT. This means, if in error you show that there’s no VAT, you can’t later demand the customer pays it. On the other hand, if you indicated that VAT would be added to the price but failed to include it on your invoice, you can issue a further invoice to correct the position. Whether this is a good approach depends on non-VAT considerations such as customer goodwill. However, where your customer is VAT registered, you give them advance warning of what you intend to do and allow them extra time to pay, they’ll be no worse off if you invoice them for the VAT. More importantly, you won’t be out of pocket.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit or call 01233 653500.