Errors on VAT invoices – what should I do?

Have you got errors on VAT invoices?

Here we talk you through what to do with any kind of errors on VAT invoices.

VAT errors on invoices

If you issue an invoice showing the wrong amount of VAT, it can have unfortunate effects for both you and your customer.

What do you need to do to put matters right?

It is important to ensure that you show the correct amount of VAT on your sales invoices, but sometime mistakes happen.

The VAT amount can be incorrect due to a mathematical error, or the wrong VAT rate can be applied, for example a zero-rated supply is treated as standard-rate, or a standard-rated supply treated as the reduced rate.

If you charge the wrong amount of VAT, you are still responsible for accounting for the higher sum. Below are a couple of examples of common errors that businesses can make and how much VAT HMRC expects you to account for.

Example 1:

A business makes a supply of goods another business subject to VAT at 20%. Due to a transposition error it charges the wrong amount of VAT. The sale is for £1150 plus VAT of £230, however, the invoice shows VAT of £320.

HMRC will still expect the supplier to pay it the £320 show on the invoice event though it’s incorrect.

The purchaser has paid of £320 but HMRC will only allow them to recover the amount of VAT that should have been charged – £230. So they will be £90 out of pocket and overall HMRC will be £180 up.

However, if the supplier issues a VAT only credit note for £90 to the customer they will only have to account for the correct amount of VAT.

Example 2:

A building company incorrectly treats a supply as subject to VAT at the lower rate of 5% when it should have been subject to the standard rate of 20%. The project was mistakenly invoice for £15,000 plus VAT of £750 when it should have been £3000.

HMRC will still want it to account for the £3000 actually due.

If the customer were able to reclaim the VAT on the project they would only be allowed to reclaim the amount actually shown on the invoice -£750 rather than the £3000 actually due. However, as they would only have paid £750 to the supplier they would not be out of pocket but HMRC would still be £2250 up overall.

The supplier can issue a supplementary invoice for the correct amount of VAT in order to recoup the undercharged amount for the customer.

This type of error is viewed as “careless” by HMRC so could attract a penalty of up 30% of the tax understated, as well as late payment interest.

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