HMRC has updated VAT Notice 700/45, “How to correct VAT errors and make adjustments or claims”, which outlines when errors on VAT returns must be disclosed to HMRC. These changes impact all businesses that calculate and submit VAT returns.
Watch a short 10-min presentation from our Indirect Tax team on the topic or read more below.
Previous Guidance: Two Methods for Correcting Errors
When an error is identified on a previously submitted VAT return, HMRC allows two methods of correction:
Method 1 – Adjust on the next VAT Return
You can correct the error on your next VAT return if:
- The net value of the error is £10,000 or less, or
- The net value is less than 1% of net sales (Box 6 of the VAT return), up to a maximum of £50,000.
A separate notification to HMRC was only required if the error was deliberate.
Method 2 – Notify HMRC Separately
You must disclose the error directly to HMRC if:
- The net value exceeds £10,000 and is more than 1% of net sales, or
- The net value is over £50,000, even if less than 1% of net sales.
Behavioural Assessment: What Does HMRC Consider?
Under Schedule 24 of the Finance Act 2007, HMRC categorises behaviour leading to errors as:
- Despite taking reasonable care: The error occurred despite taking appropriate steps, such as seeking professional advice.
- ‘Careless’/Failure to take reasonable care, e.g. ignoring advice, relying on outdated guidance, or not seeking clarification.
- Deliberate: Knowingly submitting incorrect information.
What Has Changed?
The updated guidance introduces a key change:
If an error meets the Method 1 criteria but was caused by ‘careless’ behaviour, it must corrected on the next VAT return and be separately notified to HMRC.
This means that any ‘careless’ error — including simple human mistakes like transposition errors — must be disclosed to HMRC, regardless of its value.
Penalties and Interest: What to Expect
If disclosed before HMRC discovers it, the error is considered unprompted, and ‘careless’ behaviour penalties range from 0% to 30% of the VAT error. Full cooperation with HMRC can result in no penalty being charged.
Late payment interest was introduced on 1 January 2023 and is calculated from the date the VAT was due to HMRC and date the payment is made.
The interest rate: Bank of England base rate + 4% (8% as of 8 September 2025).
Where an error results in a repayment due to the business, repayment interest will be issued by HMRC which is calculated at Bank of England base rate minus 1% (3% as of 8 September 2025).
When a separate notification is made to HMRC, they will calculate any penalties and late payment interest.
Practical Example
For example, £9,000 of output tax was under declared on the December 2022 VAT return and the error was due to ‘careless’ behaviour. As the value of the error meets Method 1, £9,000 was included on the June 2025 VAT return and declared to HMRC.
With the changes in guidance, as the error was due to ‘careless’ behaviour, it must also be separately disclosed to HMRC. HMRC will review if a penalty is appropriate and will also charge late payment interest, which in this case totals £1,799.01.
What if I do not inform HMRC of the careless error?
The amended guidance states that if HMRC is not informed of a ‘careless’ error by a separate written notification, you will not be able to gain the maximum reduction of the penalty to 0%. This means HMRC could apply a penalty relating to the error previously corrected.
How do I disclose an error to HMRC?
HMRC has removed form 652 which has previously been used to disclose errors. The following methods can now be used:
Online form – [email protected]:
- https://www.tax.service.gov.uk/submissions/new-form/notification-errors-vat-returns
- The form is submitted after you log into your government gateway account
In writing – the letter should state:
- how each error arose
- the VAT accounting period in which it occurred
- if it was an input tax or output tax error
- the VAT underdeclared or overdeclared in each VAT period
- how you worked out the VAT underdeclared or overdeclared
- whether any of the errors resulted in you paying us an amount that was not due
- the total amount to be adjusted
- the letter should be posted to: BT VAT, HMRC, BX9 1WR
Looking Ahead
The revised guidance means that any error (unless made despite taking reasonable care) must be disclosed to HMRC. This increases the likelihood of penalties and late payment interest being applied.
Additionally, HMRC’s error correction team is experiencing delays, which may further impact businesses awaiting VAT repayments that cannot be adjusted on the next VAT return via Method 1.
