A client had a VAT inspection on 31st January 2017 and the Officer has subsequently issued an assessment for underpaid output tax for an error that was made in a VAT accounting period that ended in October 2012. Their understanding is that a four year cap applies to errors made on VAT returns and that technically the Officer is out of time to assess for this mistake. What’s the correct position?
Most errors identified on VAT visits are assessed under VAT Act 1994 Section 73 and are subject to time limits that are set out in Sections 73 and 77. Unless an Officer can prove dishonest declarations they cannot assess for VAT errors more than four years after the end of the prescribed accounting period.
Assuming your client’s VAT accounting periods end January/April/July/October, to be in time under the four year rule the assessment must have been made by 31st October 2016. So, in this case you are correct and the error is out of time.
If an error is discovered within the statutory time limits then in order to go back four years HMRC must assess within one year of obtaining evidence of fact sufficient to justify the making of an assessment. If an assessment is not made within one year HMRC are only entitled to go back two years.
In the above example, if the Officer obtains all of the information in order to make the assessment during the visit, then the assessment must be made by 31st January 2018 in order to go back four years from the date of the assessment. If the assessment is not made within one year then the officer can only assess for errors within the two years immediately leading up to the date he issues the assessment.
It is important to note that these time limits apply to VAT assessments for inaccurate declarations. The four year cap does not apply to late registration and in such cases HMRC is entitled to go back 20 years.