HMRC currently do not charge default interest on net errors of £2,000 or less separately notified to them (see paragraph 2.4 of Notice 700/43 (Default Interest) and note 4 on form VAT 652).
However, the decision in R (on the application of Wilkinson) v CIR [2006] STC 270, means that this practice is not considered lawful, said HMRC in a recently published brief, and it will be withdrawn on 1 September 2008.
All error notifications (previously known as voluntary disclosures) requiring an assessment may therefore be subject to a default interest charge, irrespective of the amount involved.
However, as before, de minimis net errors can continue to be corrected on a VAT return and will not attract interest.
Putting this change into perspective, independent VAT consultant Neil Warren explains that the new voluntary disclosure rules introduced for VAT periods beginning on or after 1 July added an extra condition to the existing rules, i.e. that an adjustment can be made by larger businesses on their VAT returns (without disclosure and therefore an interest charge) if the net amount of the errors is less than 1% of their box 6 turnover for the quarter.
There is an error ceiling of £50,000. For smaller businesses, the ceiling is £10,000. The previous rules just had a monetary ceiling of £2,000.
In the past, HMRC have always allowed a business to notify errors of less than £2,000 as a disclosure (although normal practice is to include it on the next VAT return submitted by the business), and never charged interest.
However, the problem, says Neil, with the new rules is that if a taxpayer makes a disclosure to HMRC between £10,000 and £50,000 at the beginning of its VAT period, then HMRC will not know at this point if it is less than 1% of the total turnover for the business until the VAT return has actually been submitted, which could be four months later.
This is where he believes that the Wilkinson case comes into play, because in most cases HMRC could guess whether the error will be less than 1% of turnover for that particular business (based on its past trading history), but they cannot be sure.
So for them to guess could create an issue of unequal treatment to taxpayers, which is the theme of the Wilkinson case.
In effect, HMRC have dealt with this potential unequal treatment problem by saying that any disclosure notified to them will attract interest (unless it is an error type that avoids an interest charge i.e. the separate box in the return is ticked), and to avoid the charge, it is up to the taxpayer to include errors within the limits on his next VAT return.
In terms of the implications of the brief for the taxpayer, Neil does not see any great problem.
He says he has 'always encouraged businesses to adjust errors on VAT returns if the value of the errors is within the disclosure limits' and does not see 'the reason for going through the administrative exercise of notifying an underpayment if it can be legitimately adjusted in box 1 of the next VAT return'.
