V3.518 Tax understated

A person must account to HMRC for the VAT chargeable on a supply of goods or services1. Failure to issue a proper VAT invoice does not absolve a person from accounting to HMRC for the VAT due on a supply2. Similarly, if the tax chargeable exceeds the amount charged, the person must account for the excess whether or not he has issued a VAT invoice in respect of it3.

Consideration for supply not increased

The supplier can make a VAT adjustment if he does not intend to collect the understated VAT from his customer. Where this is done, the VAT due in respect of the supply is adjusted to the VAT element of the consideration already invoiced4, ie the amount actually received is treated as a VAT-inclusive amount. In other words, the amount of the error can be treated as a price reduction.

Example

X supplies goods valued at £200 and erroneously calculates the tax due thereon (at 20%) as £30, rather than the correct figure of £40. He issues a VAT invoice for £230 and is duly paid. He discovers the error but does not propose to collect the additional £10 from his customer. The additional tax to be accounted for to HMRC is calculated as follows—

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