If a VAT return understates the VAT you owe or overstates a repayment because you were careless or acted deliberately, HMRC can charge a penalty under Schedule 24 to the Finance Act 2007 of up to 30%, 70% or 100% of the extra VAT due. Telling HMRC about the error before it has reason to find it can cut a careless penalty to nothing, but adjusting the error on your next VAT return does not count as telling HMRC on its own.

When does an error on a VAT return lead to a penalty?

Paragraph 1 of Schedule 24 FA 2007 lists the documents the penalty applies to, and for VAT that includes a VAT return and any return, statement or declaration made in connection with a claim. A penalty is due where two conditions are met. First, the inaccuracy must lead to an understatement of a liability, a false or inflated loss, or a false or inflated repayment claim. Second, the inaccuracy must be careless or deliberate on your part. Each inaccuracy in a return can carry its own penalty.

No penalty is due for an error made despite taking reasonable care. VAT Notice 700/45 (section 4.1) confirms this, and describes an error as careless where you fail to take the care a reasonable person would take in the circumstances. There is a trap, though. Under paragraph 3(2), an innocent error becomes a careless one if you later discover it and do not take reasonable steps to tell HMRC.

For the general structure across all taxes, see our guide to HMRC penalties for tax return errors.

How much is the penalty for a careless or deliberate VAT error?

The penalty is a percentage of the potential lost revenue, which paragraph 5 defines as the additional VAT due or payable once the inaccuracy is corrected, including VAT wrongly repaid to you. Paragraph 4 sets the maximum percentages.

Behaviour Maximum penalty Minimum, prompted disclosure Minimum, unprompted disclosure
Careless 30% 15% 0%
Deliberate but not concealed 70% 35% 20%
Deliberate and concealed 100% 50% 30%

The higher offshore rates in paragraph 4 do not reach VAT. Paragraph 4A puts an inaccuracy that involves an offshore matter into category 1 where the tax at stake is not income tax or capital gains tax, so VAT errors stay within the standard 30%, 70% and 100% bands.

How do prompted and unprompted disclosure reduce a VAT penalty?

Paragraph 9 says you disclose an inaccuracy by telling HMRC about it, giving reasonable help in working out the amount, and allowing access to records so it can be fully corrected. Disclosure is unprompted if you make it when you have no reason to believe HMRC has discovered, or is about to discover, the error. Otherwise it is prompted.

Paragraph 10 then requires HMRC to reduce the maximum percentage to reflect the quality of the disclosure, which includes its timing, nature and extent, but never below the minimum in the table above. Our guide to prompted and unprompted disclosure covers the timing test in detail.

VAT has a specific rule on timing. VAT Notice 700/45 (section 4.9) says enquiries normally begin when HMRC makes an appointment to inspect your records. Once that appointment is booked, a disclosure will usually be prompted unless HMRC accepts you did not already know about the error. HMRC’s compliance factsheet CC/FS1a adds that where you take a long time to come forward, for example 3 years or more, HMRC usually restricts the reduction so the penalty ends up no lower than 10 percentage points above the minimum.

Does correcting an error on my next VAT return count as disclosure?

No, and this is where VAT differs from most taxes. Smaller errors can be corrected by adjusting the next return (method 1 in VAT Notice 700/45), subject to the error correction limits explained in our guide to correcting VAT errors. Section 4.3 of the notice states that a method 1 correction is not a disclosure for penalty purposes. Where the error was careless, you can only get the maximum reduction if you also tell HMRC separately in writing, by letter or error correction notification, about the error and your grounds for a lower penalty.

HMRC’s manual at CH81141 explains the reason: a VAT return does not show that a figure includes a correction for an earlier period, so the adjustment alone tells HMRC nothing.

The position is different for errors made despite taking reasonable care. CH81141 says that where such an error is adjusted within the limits, HMRC treats you as having taken reasonable steps to inform it, so no penalty arises. CH81143 gives the contrast. An innocent error of £120,000 that is simply left to reverse in a later return, without the separate notification its size required, is treated as careless.

Deliberate errors can never be corrected on a later return. Section 4.1 of the notice says they must be notified in writing or by error correction notification, with a description of how and why the error happened and the full amount.

How are timing errors and HMRC under assessments penalised?

Many VAT errors are about timing, such as output tax declared one quarter late because the wrong tax point was used. Paragraph 8 treats this as delayed tax and sets the potential lost revenue at 5% of the delayed VAT for each year of delay, apportioned for shorter periods. CH82390 confirms this covers VAT tax point errors that reverse automatically in a later return, and CH82394 measures the delay as the gap between the period end dates of the two returns.

A separate penalty under paragraph 2 applies where HMRC issues an assessment that understates your liability, such as an estimated assessment when a return is missing, and you fail to take reasonable steps to tell HMRC within 30 days of the assessment. That penalty is 30% of the potential lost revenue (paragraph 4C), with disclosure reductions available under paragraph 9.

Worked example: a careless VAT error

Illustration only. A retailer finds that £8,000 of output tax was left off a quarterly return because a batch of sales invoices was never posted. HMRC accepts the error was careless, so the maximum penalty is 30%, or £2,400.

  • The retailer adjusts the next return and writes to HMRC explaining the error before any contact from HMRC, then helps quantify it fully. This is unprompted disclosure of the highest quality, so the penalty can fall to 0%.
  • The retailer says nothing until a VAT officer books a visit, then cooperates fully. The disclosure is prompted, and the penalty cannot fall below 15%, or £1,200.
  • If the same £8,000 had instead been a tax point error declared in the following quarter, the potential lost revenue would be £8,000 x 5% x 3/12, which is £100, so the maximum careless penalty would be £30.

Late payment interest runs on the extra VAT whatever the penalty outcome, as section 4.1 of VAT Notice 700/45 confirms.

Can a VAT inaccuracy penalty be suspended, reduced or appealed?

A careless penalty can be suspended under paragraph 14 for up to 2 years, with conditions designed to stop the same error recurring. If you meet the conditions, the penalty is cancelled. If you incur another careless inaccuracy penalty during the suspension period, the suspended amount becomes payable. Deliberate penalties cannot be suspended. Our guide to suspended penalties explains how conditions are set.

HMRC can also make a special reduction under paragraph 11 where special circumstances justify it. You can appeal against the decision that a penalty is payable, its amount, and a refusal to suspend (paragraph 15). The penalty must normally be paid within 30 days of the notice (paragraph 13(1A)), and HMRC must assess it within 12 months of the end of the appeal period for the decision correcting the inaccuracy, or of the date the inaccuracy is corrected if there is no such decision (paragraph 13(3)).

Who pays if an agent or employee made the mistake?

Paragraph 18 makes the business liable for a careless inaccuracy in a return filed on its behalf, unless it can show HMRC that it took reasonable care to avoid the error. Choosing a competent adviser and giving them complete records is part of that care, but it does not transfer liability automatically. For a deliberate inaccuracy in a company’s return that is attributable to an officer, paragraph 19 lets HMRC charge part or all of the penalty to that officer personally.

Penalties for errors are separate from VAT penalty points, which apply to late returns, and from late payment penalties. Where VAT becomes due because you correct a return, the date for late payment penalty purposes is 30 days after the correction is made, under Schedule 26 to the Finance Act 2021.

What mistakes push VAT penalties higher than they need to be?

  • Correcting a careless error through method 1 and assuming that counts as disclosure. A separate letter or notification is needed for the full reduction.
  • Waiting until HMRC books a visit before raising known errors, which turns an unprompted disclosure into a prompted one.
  • Leaving an innocent error that exceeds the correction limits to reverse itself, which converts it into a careless one.
  • Ignoring an estimated assessment that you know is too low. The 30 day window in paragraph 2 starts from the date of the assessment.
  • Arguing about the penalty percentage without first establishing the behaviour. Whether an error was careless or made despite reasonable care decides whether any penalty is due at all.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.