Andrew Needham looks at the consequences of showing the wrong amount of VAT on an invoice.
It goes without saying that businesses should always show the correct amount of VAT on their sales invoices; but mistakes sometimes happen. The VAT amount can be wrongly calculated by a mathematical error, or the wrong VAT liability can be applied (e.g. a zero-rated supply is treated as standard-rated, or a standard-rated supply treated as subject to the lower rate).
Wrong amount of VAT charged
If a business shows the wrong amount of VAT on an invoice, it is responsible for accounting for the higher of the amount actually due or the amount shown on the invoice.
Here are some examples of common errors that business can make and how much VAT HMRC expects a business to account for.
Example 1: Transposition error
A business makes a supply of goods to another business subject to VAT at 20% but, due to a transposition error, charges the wrong amount of VAT. The sale is for £1,150 plus VAT of £230; however, the invoice shows VAT of £320.
HMRC would still expect the business to pay them the £320 shown on the invoice, even though it is the incorrect amount!
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 2: Wrong VAT rate
A building company incorrectly treats the refurbishment of a residential property 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 invoiced for £15,000 plus VAT of £750 when it should have been £3,000.
HMRC will still require the business to account for the £3,000 actually due.
The supplier can issue a supplementary invoice for the correct amount of VAT to recoup the undercharged VAT from the customer, assuming the contract allows them to do so.
What happens to the customer?
Example 3: Out of pocket?
Suppose that in Example 1, the purchaser has been charged and paid VAT of £320, but HMRC will only allow them to recover the amount of VAT that should have been charged (i.e. £230), so they will be £90 out of pocket and overall HMRC will be £180 in pocket.
To avoid the situation in Example 3, the customer should ask for a credit note for £90 from the supplier.
Example 4: Windfall for HMRC?
In Example 2, if the customer was 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 in pocket overall.
HMRC would view errors of this type as being ‘careless’ and so suppliers would be subject to a penalty in the range of up to 30% (plus interest).
Penalties could also apply to purchasers who overclaimed input tax based on the amount shown on their purchase invoice, as HMRC says they should have spotted the error and asked for a credit note.
Check that the right amount of VAT is charged on the invoice, or businesses 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.