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Getting your VAT return wrong can be a costly mistake. Mike Sheppard, head of VAT at Grant Thornton in the Midlands answers some common questions about VAT errors, penalties and how to avoid them. All answers are for general guidance only.

Q: I was late submitting my return last quarter and the VAT man sent me a warning. What happens if I am late again?

A: The first time HMRC fails to receive a VAT return and payment by the due date it will issue a 'Surcharge Liability Notice'. Any further defaults over the following 12 months will result in a surcharge being levied. This is calculated on a sliding scale, rising to 15 per cent of the late paid VAT if there are more than three further defaults. Once you are within this 'default surcharge' regime, the only way out is to make all VAT submissions and payments on time for a 12 month period.

There is very little flexibility in the surcharge provisions – even a short delay in settling your VAT liabilities can, if repeated, result in a surcharge being incurred. The 'proportionality' of this regime has been challenged in the Tax Tribunal, but the message is clear - ensure all returns and payments are with HMRC before the due date shown on the VAT return, particularly if paying by cheque as you must give it time to clear.

Q: I have just noticed that a sales invoice was omitted from my last VAT return in error. What should I do?

A: If the net VAT error on previous returns is less than £10,000 (or 1 per cent of net sales in the current period, up to a maximum of £50,000) an adjustment may be made on your current VAT return. However, for larger errors, full details must be provided to HMRC by means of a separate 'voluntary disclosure'. HMRC will then issue a Notice of Error Correction, together with a demand for payment of the tax together with any interest and/or penalties that are due.

It is usually advisable to make any necessary disclosure promptly and without waiting for HMRC to raise a query or arrange a control visit. This will increase the chances of HMRC mitigating the penalty that may otherwise be due (see below). Where significant amounts at are stake, businesses should consider seeking professional assistance.

Q: My company has made an error on its VAT return - will we get a penalty?

A: Recent legislation has created a single penalty framework that applies across all of the taxes administered by HMRC. This revised regime is based on behaviour and, in theory at least, taxpayers taking 'reasonable care' should not be caught at all.

However, where HMRC determines an error to be the result of a careless act or omission a standard penalty of 30 per cent of the 'potential lost revenue' is payable. Errors considered to be 'deliberate', or 'deliberate and concealed' are liable to penalties of 70 per cent and 100 per cent respectively.

There is a now no minimum size threshold before penalties become payable but they can be mitigated or suspended according to the level of disclosure and assistance provided to HMRC.

Q: HMRC has just visited and found an error in the way we treat VAT on business mileage. How far back can they go?

A: Unless HMRC suspects deliberate dishonesty, an assessment for underpaid tax cannot be made more than four years after the end of the VAT period in which the mistake arose.

A similar four year limit applies to taxpayers seeking the repayment of VAT overpaid in prior periods.

One important exception is the case of late VAT registration. A business that has failed to register for VAT despite trading above the relevant threshold (currently £70,000 p.a.) is liable to register, and account for tax, from the date the obligation to register arose. Any penalties will be payable in addition.

If you would like help on these issues or have other VAT concerns, please e-mail the Grant Thornton VAT team on VATmidlands@uk.gt.com