Incorrectly charged VAT: What you need to know

If you’re a UK VAT-registered business, you can only reclaim input VAT on business expenses that has been correctly charged. While this appears straightforward, errors are common and can lead to significant financial consequences for your business. Incorrectly charged VAT, whether due to applying the wrong rate or charging VAT where none is due, is not legally recoverable from HMRC, regardless of whether the customer paid it in good faith or whether the supplier has already accounted for it to HMRC.

Mark Ellis, VAT specialist and Partner, explains the UK rules on reclaiming input VAT, why businesses should verify VAT on supplier invoices, and the practical steps they can take to strengthen VAT invoice validation, reduce supplier VAT errors and improve HMRC VAT compliance.

Common situations where VAT errors occur

All businesses seeking to recover from HMRC any proportion of VAT at all on their expenditure must ensure VAT has been correctly applied by suppliers, as incorrectly charged VAT does not qualify as input VAT.

Errors frequently arise in areas where VAT rules are complex or uncertain.

Examples include:

Food products with unclear classification between the 0% rate and the 20% rate

Construction services where 0%, 5% and 20% rates (and combinations thereof) may apply

Land-related services where place-of-supply rules can be unclear.

In such cases, UK suppliers may default to charging 20% VAT to minimise their own risk, but this does not make the VAT recoverable if incorrectly applied.

What happens if VAT is claimed incorrectly?

If HMRC identifies errors, the consequences can be substantial. Your business may face:

Having to repay to HMRC the incorrectly charged / claimed VAT

Interest charges (currently 7.75% per annum)

Penalties, typically 15%–30% of the value of the VAT error in cases of careless errors that HMRC detect.

These costs apply even if your business relied on supplier invoices and believed its treatment was correct. HMRC places responsibility on you, the taxpayer, and will not allow businesses to retain incorrectly reclaimed VAT.

The main route to correcting errors is to seek reimbursement from the supplier, usually through a credit note and corrected invoice. However, even when successful, interest and penalties generally remain with the customer, unless contractual protections allow recovery of these costs from the supplier.

When incorrectly charged VAT becomes unrecoverable

In some situations, recovery of the VAT from the supplier may be impossible, particularly where the supplier is insolvent or no longer trading.

In these cases, the VAT may become a permanent expense in addition to the associated HMRC interest / penalty. While ‘restitution’ claims for the VAT against HMRC based on legal principles have historically been possible in limited circumstances, recent legislative changes (effective from 1 January 2024) have made this route highly uncertain.

How to prevent VAT errors in your business

Given these risks, preventive controls are essential for your business. You should carefully review VAT returns, especially those showing refunds, as they are more likely to attract HMRC scrutiny. While your accounts payable team typically check purchase VAT invoice validity, the more complex issue is verifying whether VAT has been correctly charged in the first place. This often requires specialist VAT expertise.

Many businesses now adopt a hybrid approach: preparing VAT returns internally but engaging VAT specialists to review the VAT treatment of high-value expenditure. This helps identify errors early, reduces exposure to HMRC assessments, and supports effective engagement with suppliers.

From a governance perspective, prevention is far more effective than correction. Once a VAT reclaim is made, the issue shifts from a supplier query to a compliance risk involving HMRC. Strengthening your internal controls, training finance teams, and enhancing contractual protections with suppliers can significantly reduce your exposure.

Key takeaways on incorrectly charged VAT

In conclusion, the rule that only correctly chargeable VAT is recoverable is firmly enforced. The responsibility lies entirely with businesses, and the cost of non-compliance is increasing. As a result, careful verification of supplier VAT treatment is an essential component of effective financial and risk management.

If you would like assistance reviewing your VAT position, please contact Mark Ellis or your usual PKF Littlejohn VAT adviser.

Incorrect VAT charges: Your essential FAQs

Can you reclaim VAT that has been incorrectly charged?

No. Under UK VAT rules, input VAT is only recoverable if it has been correctly charged. If a supplier applies the wrong VAT rate or charges VAT where it is not due, it is not legally recoverable from HMRC, even if paid in good faith.

Who is responsible if VAT is charged incorrectly?

The responsibility ultimately lies with the customer claiming the VAT. HMRC expects businesses to verify VAT on supplier invoices, and will not accept incorrectly reclaimed VAT, even if the error originated from the supplier.

What should you do if a supplier charges VAT in error?

You should contact the supplier and request a correction, usually through a credit note and reissued invoice. This is the primary way to recover incorrectly charged VAT, rather than attempting to reclaim it through your VAT return.

What happens if HMRC identifies incorrectly reclaimed VAT?

If HMRC identify errors, businesses may be required to repay the VAT, along with interest and potential penalties. Penalties can range from 15% to 30% of the value of the VAT error in cases of careless errors, depending on the circumstances.

Can incorrectly charged VAT ever become a permanent cost?

Yes. If the supplier cannot be contacted, is insolvent, or refuses to correct the invoice, the VAT may become an irrecoverable cost. In such cases, businesses may also still be liable for any associated HMRC interest or penalties.