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Steve Allen of VAT Advisers Ltd points out that a recent HMRC announcement may not be as helpful as it first appears. 

Introduction

During August, HMRC put a brief announcement on their website urging businesses to adjust current VAT returns if the error was under the Voluntary Disclosure limits. The reason given for this was that the Error Correction Team was currently taking six to eight weeks to process voluntary disclosures. At first glance, the announcement seems helpful, but a few words of caution are needed about the important issues that are not mentioned (Correcting Mistakes Made on Earlier VAT Returns). 

Penalty 'Disclosure'

Although adjusting a current return means HMRC will not charge interest on the amount owed to them (whereas interest can be charged on a Voluntary Disclosure even if the amount is under the limits for adjusting the current return), correcting an error in this way is not a ‘disclosure’ for the purposes of the new penalty regime. Whilst HMRC suggest that most small errors will not be ‘careless’, and therefore fall outside the new regime, there is no set definition of ‘taking reasonable care’, so there is clearly a risk that a future visiting officer could audit the adjusted return and disagree that the error was not careless. If the error is held to be careless, the taxpayer will not be entitled to maximum mitigation, as it will not have made a ‘full and unprompted disclosure’ to HMRC at the time of discovery. The one extenuating fact for the taxpayer will be the website announcement itself, as it clearly recommends correction of the error through the current returns. However, unless a copy of the announcement is printed off and retained by the taxpayer in support of the return adjustment, it seems unlikely that either the taxpayer or HMRC will be able to produce a copy of it in an argument that could ensue up to 4 years later! The offending webpage will have long since ceased to exist.

No Interest...Yet

Where the error is an amount owed to a taxpayer, a penalty should not be an issue (unless the claim is wrong, and the taxpayer has been ‘careless’ in making it). However, adjusting the current return is likely to mean that no interest is paid by HMRC, even if the adjustment were needed as a result of an HMRC error. This is because taxpayers who have corrected the return may well forget to claim the interest in writing, as is required. Once the interest rules are harmonised by the provisions of FA 2009, so that interest will be payable by HMRC on all overpayments of VAT, regardless of whether an official error or taxpayer error, this may become more important. It may be that the benefit of getting the money earlier by adjusting the current return is worth more than the amount of interest, especially now, when the rates are so low. However, it is best to have all the facts before deciding what to do.