Topic: Early claim of input tax penalties

As a result of a an input error, input tax for the first week of July 2018 amounting to £10,000 was included on the VAT return for the quarter ended June 2018. No adjustment has been made to this on the basis that the VAT would have been properly recoverable in the next quarter in any event. Is this treatment correct. Are there any penalties when i prepare VAT return for Q3?

Re: Early claim of input tax penalties

Input tax is reclaimable in the VAT return period in which it is incurred; in this case the quarter ended September 2018. The effect of the early reclaim of input tax is that the tax due for the quarter ended June 2018 is understated by £10,000 and the net tax due for quarter ended 30 September 2018 is correspondingly overstated by £10,000.

Where the total net errors discovered by a taxpayer in any VAT period do not exceed £50,000, an adjustment can be made on the next VAT return (and certain other requirements are met). Where, as here, the amount exceeds £50,000, a separate notification must be made to HM Revenue & Customs using form VAT 652 or by letter.

This error will be subject to a penalty as delayed tax. The potential lost tax for penalty purposes is a percentage of the delayed tax which equates to 5% per year. Therefore since the delay is three months, the potential lost tax is calculated as
£10,000 x 3/12 x 5% = £125.

Default interest will be payable on the amounts underdeclared. This will run from the due date for submission of the respective VAT returns until payment is made. It is the practice of HM Revenue & Customs to waive payment of interest where it does not represent commercial restitution, for example another party would have reclaimed an amount of output tax not paid. However in your case there is a net tax loss to HM Revenue & Customs and interest will be charged.