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Correcting VAT errors - HMRC’s tougher approach

Glyn Edwards · Posted on: September 11th 2025 · read

HMRC have quietly made some changes to VAT Notice 700/45 which provides guidance on how to correct errors made on VAT returns.

One key change is the withdrawal of Form 652 which was the traditional method of disclosing errors above the reporting thresholds described below. Corrections must now be made via a business’ government gateway account or in writing. A written disclosure is often preferable to allow for a more detailed explanation of the cause of the error and to outline a defence against penalty.

Other changes are principally in emphasis rather than changes in policy, but they reflect the Department’s increased focus on penalties, particularly how these might apply to errors corrected by an adjustment to a current return. The right to make those adjustments is unchanged.

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As long as not the result of deliberate behaviour, a taxpayer can correct on a current return net VAT errors discovered which are:

Below a threshold of £10,000 or

Below £50,000 and less than 1% of sales to be reported on the return period in which the mistake was discovered.

The updated notice stresses however, that where a careless error has been made the taxpayer must tell HMRC about it, even it has been validly corrected on a return.

The benefit of following that instruction is that HMRC will then be prepared to treat it as an unprompted disclosure. The penalty range for careless errors is 15% to 30%, but where it is disclosed the penalty can be reduced further, even to 0%.

Nevertheless, a likelier outcome of a notification of these careless errors to HMRC is that a penalty may be imposed, so it is more important than ever for taxpayers to take advice when errors on previously submitted VAT returns are discovered.

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Taxpayers will need to consider:

The nature of the error e.g. was it: deliberate such as the result of fraud; or careless; or a genuine mistake despite taking reasonable care.
The size of the error.
How it arose and how to explain this to HMRC.
What steps to put in place to prevent a repeat.

HMRC’s policy creates an incentive for businesses who discover errors below the separate reporting thresholds to treat them as ones which have arisen despite taking reasonable care. This avoids the requirement to tell HMRC about the correction and therefore bypasses awkward conversations about penalty and unwanted demands for interest.

However, HMRC’s view of what constitutes careless behaviour is wide – a book-keeping error; a failure of digital links; or a mistake where the matter is covered somewhere in HMRC’s guidance are all generally considered to fall into the careless category.

Our expectation is that HMRC officers, when carrying out compliance checks, will routinely ask a business whether it has made a correction on a VAT return. If yes, then expect a grilling on why HMRC were not separately informed of the error and a subsequent battle over penalties.

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In passing, HMRC’s new notice also mentions that late payment interest will apply where errors resulted in VAT being paid late. Notifying HMRC of a correction made on a return can still lead to an interest charge as well as penalties.

One final word of caution

"If a taxpayer fails to take steps to correct an error which was neither careless nor deliberate, then HMRC will treat it as careless when they discover it and apply penalties accordingly."

Glyn Edwards, VAT and Indirect Tax Director

HMRC warn: If you deliberately fail to correct an under-declaration of VAT, you may be liable to a penalty or even criminal prosecution.

How can MHA help?

If your business has discovered VAT errors or is unsure how HMRC’s tougher approach might affect you, now is the time to seek professional advice.

Get in touch with Glyn Edwards or James Davies today to discuss your situation and ensure any corrections are handled in the most effective way possible.