skip to navigationskip to main content

Telephone: 01432 808150

VAT - charged too much?

Newsletter issue - February 2022

Suppose that a business has been paying its suppliers' invoices for many years without really giving too much thought to the VAT being applied. The business engages an accountant to assist with its VAT returns due to an increase in business activity. The accountant immediately spots that one supplier has been incorrectly charging standard rate VAT instead of the correct reduced rate of 5%. On inspection, this is a long-term issue going back many years.

The business has a problem, because the VAT legislation requires VAT to have been correctly charged at the correct rate in order for it to be able to be claimed as input tax on the VAT return. This underlines why it is so important to check VAT invoices as and when they are received.

The business owner believes things aren't as bad as the accountant is making out. Unfortunately, the input tax reclaims are errors and will need to be corrected going back four years. There is no question of the error being deliberate or fraudulent, so the longer 20-year assessment window won't apply.

The errors will need to be either notified on the next VAT return (if the total net errors exceed £10,000, or if they are less than £50,000 and less than 1% of the box 6 total on the relevant return), or by using Form 652.

To work out what the corrective figure needs to be, the payments to the supplier in question for the previous four years will need to be treated as if 5% VAT was included using the VAT fraction 5/105.

Let's say that on investigation, the total payments were £100,000 plus £20,000 in "VAT". The business has claimed £20,000 in input tax in this period. However, the input tax entitlement is only £120,000 x 5/105 = £5,715. The VAT error is therefore £14,285. This will need to be disclosed in writing, unless it is less than 1% of the box 6 figure. Unfortunately, late payment interest will also apply if the error can't be disclosed via the return.

The business should also ask the supplier for a VAT credit for the overpaid amount, i.e. £100,000 x 15% = £15,000.

Sign up for our newsletter