Can officers ignore minor input tax errors?

Best judgement

HMRC has the power to issue an assessment if an officer thinks that your business has underpaid VAT on a past return. These are commonly described as “best judgement” assessments, a direct reference to the legislation in s.73 VAT Act 1994 . There have been many tribunal cases and disputes about this phrase but an officer must use all information available at the time of their review, and act fairly and honestly in deciding how much tax to assess.

An officer can only issue an assessment for the last four years. Errors for periods before then are out of time. The exception is for underpayments that have been caused by deliberate behaviour where the time window increases to 20 years.

If you disagree with an assessment, you must always lodge an appeal within 30 days, asking for it to be reconsidered by a different officer.

Officer discretion

HMRC has recently amended its published guidance to clarify when an officer might not issue an assessment for input tax errors. To summarise the revised policy:

1. The legislation says that HMRC “may assess” rather than “must assess” if an officer discovers past errors. This gives flexibility.
2. The guidance accepts there are situations “where applying the law strictly may not be the best course of action”.
3. An example of an inappropriate assessment is when “raising and enforcing an assessment would cost more than the amount of input tax to be recovered.”
4. Override situations will be exceptional “but each case must be judged on its particular facts.”

Example. Bob is a self-employed gardener and he buys a monthly gardening magazine from his newsagent for £4 plus VAT. The newsagent has incorrectly charged VAT, even though the magazine is zero-rated, and Bob has claimed input tax. An officer has identified the error but Bob should argue that an assessment for £38.40 (80p x twelve editions x four years) would be a waste of everyone’s time, especially as the newsagent has almost certainly accounted for output tax, so HMRC is not out of pocket.

You should reassure the officer that you will make accounting amendments to prevent future errors.

Commercial dispute

If your business has been incorrectly charged VAT by a supplier, you must challenge the supplier and refuse to pay the tax, either asking for a VAT credit or a revised invoice. You can only claim input tax on correctly charged VAT, even if your supplier has issued a proper tax invoice.

What happens if you pay VAT in good faith and realise the error perhaps several months or years later, and have claimed input tax on your return? Your business must repay to HMRC the input tax you have incorrectly claimed in accordance with the error correction procedures . This is now a commercial matter/dispute between you and the supplier to resolve.

The best outcome is for your supplier to submit an error correction claim to HMRC for overpaid output tax, so they can issue a VAT refund to your business to balance the books.