How to correct VAT errors and make adjustments or claims
Running a VAT-registered business means keeping your records in good order, but inevitably, errors may occur — perhaps a tax miscalculation or an invoice was misclassified. The key is not to panic, but to understand how and when you can correct mistakes — and make any adjustments or claims — properly under HMRC’s rules. Read the blog to know what to do when a VAT error is discovered.
What counts as a VAT error — and when can you fix it?
First things first: not all “mistakes” are treated the same way under VAT law. Some issues are part of the normal course of adjustments (for example, capital goods scheme adjustments, credit notes, partial exemption calculations) and aren’t classed as “errors” so long as they’re made correctly and at the right time.
An error, in HMRC terms, is something like:
- Mis-recording the VAT amount in your bookkeeping (before or after the return)
- Charging the wrong VAT on a sale (or missing VAT that ought to have been charged)
- Failing to claim input VAT that you were entitled to
- Over-declaring VAT you didn’t owe
If you spot such errors before you submit a return, you simply correct your internal records and let the correct value flow into your return. The real challenge arises when you discover the error after your VAT return has already been filed.
How far back can you correct a VAT error?
Probably your first question will be: “Can I correct an error from years ago?” The short answer is: yes — within limits.
- For errors in output VAT (i.e. under- or over-declared VAT on sales) and over-claimed input VAT, you generally have up to four years from the end of the accounting period in which the error occurred.
- For under-claimed input VAT, the time limit runs from the due date of the return in which you should have claimed it.
- However — and this is crucial — if the error is considered deliberate, there is no time limit under the usual 4-year rule. (Deliberate errors must always be disclosed by separate notification.)
So, correct errors promptly — you don’t want to lose the opportunity later.
Two methods to correct VAT errors: which to use?
Once you’ve recognised an error in a submitted return, HMRC allows two main paths to put things right:
Method 1: Adjust via your next VAT return
This is the simpler route. You can use it if:
- The net value of all errors is £10,000 or less; or
- The net error falls between £10,000 and £50,000, and it does not exceed 1% of your net output value in that return period.
- The error was not deliberate.
- You are confident it was not “careless” (or you’re willing to disclose separately for penalty mitigation).
- It’s within the time limits.
If Method 1 applies, you enter the net adjustment on your next VAT return. If you owe more VAT, or if HMRC owes you a refund.
One nuance: even though correcting via your return is not in itself a “disclosure” for penalty purposes, if you believe an error was careless, you should separately notify HMRC (either by letter or the error correction notification), to help with penalty mitigation.
Method 2: Notify HMRC separately (disclosure/error correction notification)
You must use this route (or may choose to do so voluntarily) when:
- The net error exceeds £50,000.
- The error is between £10,000 and £50,000, and it exceeds 1%.
- It is a deliberate error;
- You prefer to make a formal disclosure even if the error is smaller.
Under this method, you cannot correct the error on your next VAT return — you must notify HMRC separately, providing full details.
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What does a notification to HMRC need to include?
Whether you use HMRC’s online error correction route (see below) or send a written disclosure, your notification must set out:
- How each error came about
- The VAT accounting period(s) the error relates to
- Whether it’s output tax or input tax
- The precise amount under- or over-declared or under-claimed
- Your calculations or reasoning
- Whether any VAT was paid that shouldn’t have been
- The total amount you want adjusted or repaid.
Once HMRC accepts your notification, they’ll issue you a correction statement showing how much is payable (or repayable), and details of interest if applicable.
If you haven’t heard back within 40 working days, you should chase HMRC to ensure they’ve received it.
If you’re exempt from Making Tax Digital (MTD) for VAT, you can’t use the online route — you must notify in writing (letter or email) to the VAT Error Correction Team.
How to make the adjustment or claim
Once HMRC processes the correction:
- If you owe extra VAT, you’ll have a deadline to pay it (plus interest)
- If HMRC owes you a repayment, you’ll receive it (with interest, unless denied by “unjust enrichment” – see below)
- You must update your VAT accounts to reflect the corrected figures.
- Keep records of the original error, the correction, any repayments, etc.
Unjust enrichment: when refunds can be refused
One of the trickiest areas is unjust enrichment. HMRC may refuse to repay overpaid output VAT if they believe the cost was passed on to your customers. In those cases:
- You may be required to refund customers (with interest) within 90 days.
- If any refunds remain outstanding after 90 days, you must return the residual amount to HMRC within 14 days.
- You must keep full records of refunds, names, addresses, interest paid, etc.
- You can’t deduct administration costs from reimbursement.
- This scheme doesn’t apply to sales to VAT-registered customers who claimed the VAT themselves.
If you don’t comply with the reimbursement scheme when required, HMRC may deny repayment.
Penalties, interest and risk mitigation
When correcting errors, bear in mind:
- Interest is charged on underpaid VAT from the due date until payment is made
- Penalties depend on whether the error was “careless” or “deliberate”
- If you voluntarily disclose errors (especially before HMRC contacts you), you may receive a lower penalty
- If HMRC discovers the error first, they may open an enquiry and impose steeper penalties
So, acting promptly, fully and transparently is your best defence. If you are unsure about which method to use, reach out to us, and our accountants will help you correct your VAT errors.
Author
Mukund is a founding member of the Affinity Associates Group and has been with the practice for nearly 40 years. After completing his degree in Accounting and Finance, he went on to qualify with both ACCA and ICAEW in 1991. Over the years, he’s built deep expertise in consultancy, tax, business development, and corporate group structures. Mukund is known for helping clients make sense of complex financial challenges and turning them into opportunities for sustainable growth.
