VAT: Overpayments and Underpayments

If a VAT-registered business calculates its VAT liability incorrectly, it must amend the error as soon as possible.

In those cases where the net value of the error is less than £2,000, the business can adjust its VAT record and make the payment (or claim) on its next return.

If, however, the amount exceeds £2,000, then the business must inform HM Revenue and Customs of the mistake. This is called making a Voluntary Disclosure, and is done using Form VAT 652 or writing to the local HMRC office.

In either case, the business must include details covering: how the error or errors happened; the VAT accounting period in which they occurred; whether they involved input tax or output tax; the VAT underdeclared or overdeclared in each VAT period; how the underdeclared or overdeclared VAT was calculated; whether any of the errors resulted in the business paying HMRC an amount that wasn’t due; and the total amount to be adjusted.

If the amount was underdeclared, the business will need to include sufficient detail about the error to allow HMRC to decide whether any interest is owing.

The business must not then make adjustment for the same errors on a later VAT return.

It is important that the business retains a record of any Voluntary Disclosures it makes to HMRC.

When an overpayment has been made, the business must reclaim the money within three years of the error being made.