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?
Get the VAT correct
It goes without saying that you should always show the correct amount of VAT on your sales invoices, but mistakes sometimes 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-rated, or a standard-rated supply treated as the reduced rate.
Wrong amount charged
If you charge the wrong amount of VAT, you are still responsible for accounting for the higher sum; typical of any dealings with HMRC it’s a case ‘heads they win, tails you lose’.
Let’s look at a couple of examples of common errors that businesses can make and how much VAT HMRC expects you to account for.
Example: A business makes a supply of goods to another business subject to VAT at 20%. Due to a transposition error it charges the wrong amount of VAT. The sale is for £1,150 plus VAT of £230; however, the invoice shows VAT of £320.
HMRC will still expect the supplier to pay it the £320 shown on the invoice even though it’s incorrect.
The purchaser has paid VAT 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.
Tip: 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: 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 invoiced for £15,000 plus VAT of £750 when it should have been £3,000.
HMRC will still want it to account for the £3,000 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 £3,000 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 £2,250 up overall.
Tip 1: The supplier can issue a supplementary invoice for the correct amount of VAT in order to recoup the undercharged amount from the customer. This is assuming the contract allows them to do so.
Penalty: This type of error is viewed as ‘careless’ so could attract a penalty of up to 30% of the tax understated, as well as late payment interest.
Tip 2: Refer to VAT Notice 700/45 for further guidance on putting errors right.
It’s important to check that the correct amount of VAT is charged on the invoice or you could be out of pocket even if HMRC is always up on the deal If the wrong amount of VAT has been charged it can be adjusted through the issue of credit notes or supplementary invoices market ‘VAT only’.