Home For AAT student members AQ 2016 Advanced Diploma in Accounting Indirect Tax

How to adjust for errors in Output & Input Tax

JSmithJSmith Registered Posts: 4
Hi,

I'm having trouble getting the errors from previous returns adjusted correctly as sometimes I cant decide whether to use box 1 or box 4. For example:

You are told that standard-rated purchases of £475 plus VAT were wrongly included as £4,750 plus VAT in the previous VAT Return. This must be corrected in this Return.

Would I treat this as an underpayment of output tax and therefore made an addition to box 1 in the VAT return or treat it as an overpayment of input tax and make a subtraction in box 4?

Sorry if this doesnt make sense.

Comments

  • ChanaatChanaat Registered Posts: 36
    @Jsmith, An overclaimed input vat AMT( 855 ) in the previous return must be deducted from Box 4 in the next VAT return.

  • JSmithJSmith Registered Posts: 4
    @chanaat Thank you very much for the help!
  • gg25gg25 Registered Posts: 8
    I don't think the above is correct. I agree with the fact that the input tax has been overclaimed by £855, however, this would be added to box 1 (output tax) as you have claimed too much VAT, therefore you need to pay this back.

    So, your box 1 figure would be VAT on sales-returns + £855
    Box 4 would only include VAT on purchases- returns + VAT on any EU acquisitions.
  • ChanaatChanaat Registered Posts: 36
    @gg25,

    Thanks for bringing this. Even I thought, the input VAT overclaimed or underclaimed must be adjusted in BOX 4 in the next VAT return. After reading your answer, checked it. I agree with you.


    Making the adjustment is as follows:

    add the net value to box 1 for tax due to HMRC; or
    add the net value to box 4 for tax due to you.
    You must also keep details of the nature of the error and the date that it occurred. Your own VAT must also be corrected.


    @ JSmith, The amount has to be added to BOX1.

    gg25
  • JSmithJSmith Registered Posts: 4
    @gg25 @Chanaat Thank you both for the responses, it is now clear :)
    gg25
  • ChanaatChanaat Registered Posts: 36

    Assessment Question

    A business has just discovered it made the following non deliberate, non careless errors that effect its previous VAT return

    Vat of 56 on an invoice to a UK customer was entered twice in the accounting records
    VAt of 178 on a credit note to a UK customer was omitted from the accounting records

    The business is permitted to correct the net error on its current VAT return.

    Question
    Which corrections should the business make in Box 1 of its current VAT return?

    The answer in the book shows Deduct 234




    Error adjustments were asked to make in BOX 1 of the VAT return, as the errors were related to output tax only in the previous return.

    if this correct,

    then the answer to JSmith's question should be adjustment in BOX 4,

    And I think the following is to be considered when we have both input and output tax to be adjusted in the current VAt return.

    Making the adjustment is as follows:

    add the net value to box 1 for tax due to HMRC; or
    add the net value to box 4 for tax due to you.
    You must also keep details of the nature of the error and the date that it occurred. Your own VAT must also be corrected.

    Is this right? or Am I missing something.....
    Please clarify. I have Indirect Tax assessment on monday, help me to understand how to do adjustments in VAT return.

    Many Thanks,
    Chan


  • gg25gg25 Registered Posts: 8
    1st adjustment- you have essentially paid the VAT on this sales invoice twice- paid £112, instead of £56. This means you are owed back £56 from HMRC.
    2nd adjustment- again, you would have paid £178 on this sales invoice, however, the sale was returned and you never reclaimed this VAT amount back because it was omitted. Means HMRC owes you £178.
    The total amount you are able to claim back- £234.

    Any amount that increases the amount of VAT you owe(output), is added to box 1.
    Any amount that decreases the amount of VAT is due (input), is added to box 4.
    You would only add the VAT amounts to the boxes, not the net amount.

    Therefore, you should be adding the £234 to box 4 as this is increasing the amount that HMRC owes you.

    Please let me know how the exam goes, as I am currently working on indirect tax too!
  • ChanaatChanaat Registered Posts: 36
    @gg25

    Thank you for writing ur POV.
    This is a practice assessment question from BPP book.

    For the given adjustments to be made...

    Please see the question below and the correct answer from the options provided. Note the question itself prompts us to enter our answer in BoX 1 of the return.


    Question
    Which corrections should the business make in Box 1 of its current VAT return?

    Options : add 234
    Deduct 234
    Add 222
    Deduct 212


    The answer in the book shows
    Deduct 234

    I am also confused. I am self studying.
    Do share what you understand.



    Thanks
    Chan
  • gg25gg25 Registered Posts: 8
    Could you send a photo of the question, please?
  • ChanaatChanaat Registered Posts: 36
    @gg25

    I just worked on a vat return question, that has an adjustment to be made in the return. The adj info is :

    An error was made in the previous return. Input tax was over claimed by 5450.95

    The answer shows 5450.95 deducted in BoX 4.

    So for JSmith's question, the deduction in Box 4 is the correct one.

    From the above questions, I understand that the errors pertaining only to input tax must be adjusted in Box1 and errors pertaining only to output tax must be adjusted in Box 4.

    If errors are identified in both input and output tax, we need to apply net calculation and follow the below rules.

    add the net value to box 1 for tax due
    to HMRC; or
    add the net value to box 4 for tax due to you.
    You must also keep details of the nature of the error and the date that it occurred. Your own VAT must also be corrected.



    I am assuming this is the way to make adjustments. Take a look and do share with me what you think.


    Chan
  • ChanaatChanaat Registered Posts: 36


  • JSmithJSmith Registered Posts: 4
    Before I posted my original question, I have been doing adjustments the same way as @gg25 I just wanted to be sure. I asked my tutor a few days ago and got this response. Hopefully it will help you.


    HMRC have updated their requirements when dealing with VAT errors on a previous return.

    HMRC now require that the net amount only is used as the adjustment figure.

    If the net amount of the error was an overpayment of tax then the net figure will be added to the debit side of the VAT control account and box 4 of the return.

    If the net amount of the error was an underpayment of tax then the net figure will be added to the credit side of the VAT control account and box 1 of the return.

    The limits for correcting errors from a previous return remain unchanged
  • gg25gg25 Registered Posts: 8
    I think it may appear that there is a different treatment depending on the question?

    I was thinking of the adjustments as if I was doing the VAT return questions (questions 6&7 of the exam). Add anything that increases the amount you pay to box 1 and add anything that decreases the amount you pay to box 4.
    Is that still correct?

    For @Chanaat question- based on the above. You have reclaimed too much VAT from customers therefore the net amount of the VAT was an underpayment of tax therefore you have to deduct the amount from box 1- which is what you are going to claim back from HMRC.

    Does this sound correct?
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