Recovering underclaimed input tax

Four different errors

There are only four different categories of error that will be relevant to your business as far as part returns are concerned:

1. output tax overpayments
2. output tax underpayments
3. input tax underclaims; and
4. input tax overclaims.

For the first three categories, you can only make corrections going back a maximum of four years, based on the final date of the VAT period; this window applies to both under and overpayments.

Example. It is 2 February 2027 and you have identified output tax errors of £1,000 per quarter for the last five years, they are all underpayments. You only need to correct them for periods March 2023 and later if you submit calendar quarter returns. Periods up to and including December 2022 are out of time. The total VAT owed is £16,000, i.e. from March 2023 to December 2026 inclusive. As this amount exceeds £10,000, you must disclose it separately to HMRC online and not include it on your next return.

If your quarterly sales in Box 6 of the next return will exceed £1.6m, i.e. the error of £16,000 is less than 1% of this figure, you can include it on the return because it is also less than £50,000.

HMRC will charge interest when you submit the error correction notice. Interest is not a penalty and is classed as commercial restitution because the money has been in your bank account for too long rather than HMRC’s account.

Input tax underclaims

Sticking with the above example, what would happen if you had underclaimed input tax by £1,000 per quarter for the last five years? In this situation, the four-year time clock is not based on the end of the accounting period but the due date of the return. If you submit online returns, this is one month and seven calendar days after the end of the period.

Example. It is 2 February 2027 and you have identified past input tax underclaims of £1,000 per quarter going back five years. You can submit an error correction notice to HMRC for £17,000 because the return for December 2022 is still in time as the relevant date is 7 February 2023, i.e. the due submission date of the return. You have gained an extra three-month windfall compared to other error categories.

You must submit your online correction to HMRC by 7 February 2027 otherwise the December 2022 period will be time barred.

A limited number of businesses still submit paper returns and do not benefit from the extra seven-day window. The time deadline for input tax underclaims will be one month after the end of the accounting period, i.e. 31 January 2023 in the above example.

Annual accounting scheme (AAS)

If your business uses the AAS, the deadline for submitting a return is two months after the end of the annual period, i.e. 28 February in the case of an annual return ending on the previous 31 December. This extra time window could enable your business to claim input tax for an extra twelve months if the dates are kind.