What Happens if You Misfile VAT Returns?

Even the most diligent businesses make mistakes. The most frequent VAT Return Mistakes include:

1. Using the wrong VAT rate – Applying the standard 20% rate to goods or services that are zero-rated or exempt.

2. Missing purchase invoices – Forgetting to include input VAT from suppliers, losing the chance to reclaim it.

3. Claiming VAT on non-business expenses – For example, client entertainment, personal use of fuel, or mixed-use costs.

4. Incorrectly handling deposits or advance payments – VAT may be due when payment is received, not when the product is delivered.

5. Errors with reverse charge transactions – Especially common in construction and cross-border trades.

6. Miscalculating partial exemptions – Businesses dealing in both taxable and exempt supplies often get this wrong.

7. Submitting late or missing returns – Even if no VAT is due, failing to submit on time triggers penalties.

According to a Sage UK report, more than 50% of small business owners admit to making VAT errors due to misunderstanding complex rules.

If you file incorrect figures—whether overclaiming VAT, underpaying, or missing entries—HMRC will treat it as a VAT error. The consequences depend on three factors:

1. Was the error careless or deliberate?

2. How large was the error?

3. Did you disclose it voluntarily?

1. Minor Errors

For small, unintentional errors—say, a misplaced invoice or rounding mistake—you can usually fix it in your next VAT return if:

• The error is below £10,000, or
• It is less than 1% of your sales (up to a maximum of £50,000)

In that case, you can adjust your next return under HMRC’s guidance:

HMRC: Correct Errors on Your VAT Return

2. Major Errors

If the error exceeds the above limits or was made deliberately, you must report it to HMRC using form VAT652. Failure to report serious errors can result in penalties, interest, or even investigations.

HMRC expects you to be proactive. Voluntarily disclosing an error reduces penalties significantly. In contrast, if HMRC discovers it during an audit, fines can reach up to 100% of the VAT owed for deliberate errors.

3. Penalties and Interest

HMRC applies interest on late VAT payments and penalties for carelessness or inaccuracy. The penalty percentage depends on how quickly you correct the issue:

• 0% – 30% if you disclose voluntarily
• 15% – 100% if HMRC finds it first

More details are available here:

HMRC VAT Penalties Guidance (Notice 700/50)

Here’s what to do if you’ve made a mistake:

Step 1: Identify and Document the Error

Review your accounting records to confirm what went wrong—whether it’s a missing invoice, wrong rate, or duplicate entry. Keep clear evidence of your findings.

Step 2: Check the Thresholds

Determine whether you can adjust the next return or must file a VAT652. The thresholds are essential for deciding the correct procedure.

Step 3: Make the Correction

If you’re under the threshold, correct it in your next return by adjusting the box totals. If above, complete the VAT652 form and submit it to HMRC by post or via their online form.

Step 4: Monitor the Outcome

HMRC may contact you for clarification or request supporting documentation. Keep everything well-organised to avoid delays.

If your business struggles with repeated inaccuracies or complex VAT structures, professional help from Loyals’ VAT and Tax Compliance Experts ensures future accuracy.

Under the old paper system, errors often went unnoticed until a manual audit. But since Making Tax Digital became mandatory for all VAT-registered businesses, HMRC can now track filing patterns, payment delays, and data anomalies almost instantly.

Digitalisation has reduced manual errors but introduced new risks—like duplicate integrations between accounting platforms or incorrect mapping of VAT codes.

For an overview of digital requirements, see:

• HMRC – Making Tax Digital for VAT
• Xero Guide to VAT and MTD Compliance

Businesses must ensure their accounting software is correctly configured and that each VAT code corresponds with the right rate and type of transaction.

Prevention is always cheaper than correction. Here’s how to minimise VAT inaccuracies:

1. Use MTD-compliant software with clear VAT coding.

2. Reconcile monthly, not just quarterly—spot errors before they multiply.

3. Train staff to understand which expenses are VAT-eligible.

4. Keep all records digitally, including scanned invoices and receipts.

5. Schedule internal reviews or external audits annually.

The Institute of Chartered Accountants in England and Wales (ICAEW) recommends a “four-eyes” review process—having another person check the return before submission. This simple practice reduces filing errors by up to 60%.

VAT is a high-volume, high-stakes tax. One small oversight can create large cumulative errors. Professional advisors bring both precision and perspective:

• They know how to interpret complex rules (reverse charge, exemptions, partial exemptions).
• They monitor deadlines and changes to HMRC guidance.
• They correct inaccuracies proactively and keep communication with HMRC professional.

At Loyals, our Tax Compliance Services and Quarterly VAT Returns by Loyals give businesses:

• MTD-compliant digital filing
• Error-prevention reviews before submission
• Voluntary disclosure support if mistakes occur
• Ongoing advisory on VAT optimisation and cash flow planning

With expert oversight, VAT stops being a risk and becomes a predictable, well-managed process.

Ignoring or hiding VAT mistakes can be catastrophic. Beyond fines and interest, HMRC can open a compliance review that extends to several years of returns. In serious cases, deliberate misstatements may lead to:

• Assessment of underpaid VAT for up to four years (or longer for deliberate errors)
• Suspension of VAT repayments
• HMRC inspections at your premises
• Public record of penalties (for persistent offenders)

Once trust is lost, future interactions with HMRC become more rigorous. Correcting VAT Return inaccuracies promptly preserves both your reputation and your financial integrity.

VAT compliance isn’t just about paying tax—it’s about maintaining accuracy, transparency, and trust. Misfiled VAT returns can lead to fines, stress, and wasted time, but they can also be corrected efficiently with the right approach.

Understanding what happens if you misfile VAT returns—and acting quickly—keeps your business on the right side of HMRC. Partnering with professionals ensures you not only correct past inaccuracies but prevent them from happening again.

👉 Avoid VAT errors before they cost you. Book a call today and let our experts manage your VAT compliance—accurately, efficiently, and on time.