Fix VAT problems

VAT troubleshooting guide

VAT mistakes happen. The key is fixing them quickly and correctly to minimise penalties and interest charges.

Choose your problem:

• Made an error on a VAT return
• Charged wrong amount of VAT
• Submitted VAT return late
• Paid VAT late
• Received a penalty notice
• Cannot pay VAT bill
• HMRC query or compliance check

Made an error on a VAT return

If you discover an error on a VAT return you have already submitted, the correction method depends on the size of the error.

Key point: Voluntary disclosure of errors almost always results in lower penalties than if HMRC discovers the error during a check.

Charged wrong amount of VAT

Common issues include charging VAT at the wrong rate or charging VAT on exempt supplies.

Over-charged customers: You must issue a credit note and refund the excess VAT to the customer, then adjust your next VAT return.

Under-charged customers: If you should have charged VAT but did not, you may need to issue a corrected invoice. If you cannot recover the VAT from the customer, you are still liable to pay it to HMRC.

Wrong rate: If you applied 20% instead of 5% (or vice versa), issue correcting documents and adjust your next return.

Submitted VAT return late

HMRC uses a points-based penalty system for late VAT returns. Each late submission adds a penalty point.

First-time late: You receive a penalty point but no immediate financial penalty (unless you have already accumulated points).

At threshold: Once you reach the points threshold for your filing frequency, you receive a £200 penalty for that late return and every subsequent late return until you reset your points.

Resetting points: Submit all outstanding returns and then file on time for the required compliance period: 24 months for annual filers, 12 months for quarterly filers, or 6 months for monthly filers.

Paid VAT late

Late payment triggers both interest and penalties. Interest starts from day 1; penalties kick in after 15 days.

First 15 days: No penalty, but interest accrues from day 1 at the Bank of England base rate plus 4%.

16-30 days late: First penalty of 3% of VAT outstanding at day 15.

Over 30 days: A further 3% applies to the amount still outstanding at day 30, plus a daily penalty at an annualised rate of 10% from day 31 until you pay in full.

Action: Pay as soon as possible to minimise penalties. If you cannot pay in full, contact HMRC to arrange a Time to Pay agreement.

Received a penalty notice

If HMRC has issued a penalty, you have options to challenge it if you have a reasonable excuse.

Appeal deadline: 30 days from the penalty notice date.

Steps to appeal:

1. Request a review from HMRC (explain your reasonable excuse)
2. If the review is unsuccessful, appeal to the Tax Tribunal

While appealing: You should still pay the penalty to stop interest accruing. If your appeal succeeds, HMRC will refund the payment with interest.

Cannot pay your VAT bill

If you are struggling to pay your VAT bill, do not ignore it. Contact HMRC to arrange a payment plan before the deadline if possible.

Before the deadline: If you set up a Time to Pay agreement before the payment is due, you will not receive late payment penalties (though interest still applies).

After the deadline: Penalties already incurred still apply, but further penalties are suspended while you stick to the payment plan.

Online self-service: VAT debts up to £20,000 can be arranged online through your Government Gateway account.

HMRC query or compliance check

HMRC may contact you to query your VAT return or announce a compliance check. Do not panic - most queries are routine and can be resolved with good records.

Preparing for a compliance check:

• Gather all VAT invoices (sales and purchases) for the periods being checked
• Ensure your VAT account reconciles with your returns
• Review common error areas: input tax claims, exempt vs taxable supplies, error corrections
• Consider getting professional advice if you have concerns about your records

Note: A guide on preparing for VAT compliance checks is coming soon.

During the check:

• Be cooperative and honest - provide what HMRC asks for
• Do not volunteer information beyond what is requested
• Ask for time if you need to gather documents
• Keep notes of what HMRC examines and any issues raised

If errors are found: HMRC will assess additional VAT plus interest. Penalties depend on whether the error was careless, deliberate, or simply a mistake. Voluntary disclosure during a check can reduce penalties.

Quick reference: VAT deadlines

Most VAT problems can be avoided by staying on top of deadlines.

Getting help

If you are stuck or the problem is complex, get professional advice early. It is usually cheaper than the penalties and interest that accumulate if problems are left unresolved.

When to get professional help:

• Large discrepancies spanning multiple VAT periods
• Deliberate or careless error penalties
• HMRC compliance check or investigation
• Complex partial exemption issues
• International or cross-border VAT problems
• Appeals to the Tax Tribunal