How to Fix VAT Margin Scheme Errors in the UK
If you’ve made a mistake on your VAT Margin Scheme return, you’re definitely not alone. Whether it’s a missing record, a wrongly included item, or just a miscalculated margin, errors can happen.
HMRC expects the occasional slip-up and gives you the chance to rectify the situation before it develops into something more serious.
In this post, we’ll walk you through how to correct errors under the VAT Margin Scheme, the difference between careless and deliberate mistakes, and the safest way to fix things without triggering penalties.
Sounds like something you’d be interested in? Awesome. Let’s jump right in then!
What counts as an error in a VAT Margin Scheme?
When you're using the Margin Scheme, it’s especially important to understand what qualifies as an actual “error” in HMRC’s eyes.
An error under the VAT Margin Scheme could be:
Including ineligible goods (like new items or stock bought with a VAT invoice)
Applying the scheme to sales that should have been standard-rated
Incorrect margin calculations (like deducting the wrong purchase price)
Recording the sale or purchase in the wrong VAT period
Showing VAT separately on an invoice when using the scheme (a common one)
Failing to include required stock records or audit trail information
Some of these are more serious than others, but even small mistakes can have serious repercussions, especially if they lead to underpaid VAT or missing records that HMRC picks up on.
For example, if you buy a car from a VAT-registered business and include it in your margin scheme calculations, HMRC can disallow the claim and require VAT on the full sale price, not just the profit margin. The same goes for second-hand jewelry bought with VAT shown on the invoice.
These errors are often unintentional, caused by admin oversights or misunderstandings about eligibility. That’s why it’s important to catch them early and know the right way to fix them.
How to correct VAT return mistakes with HMRC
If you spot a mistake on a submitted VAT return under the Margin Scheme, you don’t have to panic; HMRC allows you to correct most errors yourself. But the method depends on how big the error is.
If the net value of the VAT error is £10,000 or less, or between £10,000 and £50,000 but no more than 1% of your turnover, you can usually fix it by adjusting your next VAT return.
Just make sure you:
Keep detailed records of the correction
Clearly explain what happened and how you fixed it
Avoid repeating the same type of mistake in future returns
For more serious or larger errors, or anything that might seem deliberate or careless, you’ll need to submit a VAT652 error correction form to HMRC.
You can do this online or by post, and you should include:
The period the error relates to
A full explanation of the mistake
The correct figures and how you worked them out
Supporting evidence like invoices, stock records, or calculations
HMRC recommends you make these corrections as soon as possible, even if it was an honest error. Voluntarily disclosing a mistake can reduce or eliminate penalties, especially if you’re open and cooperative.
Just remember: correcting the error doesn’t mean it’s forgotten. If HMRC finds signs of repeated carelessness or a lack of reasonable care, they may still apply penalties or trigger a compliance check. That’s why being thorough and honest goes a long way.
When do I need to formally report a VAT error?
Some VAT mistakes can’t just be swept into your next return. HMRC has clear rules about when you need to report an error directly, rather than quietly correcting it yourself.
You’ll need to formally notify HMRC if:
The net VAT error is more than £10,000
It’s between £10,000 and £50,000 and exceeds 1% of your business’s turnover
The error was deliberate or careless, even if the value is small
You’re unsure whether the scheme was applied correctly
The correction could change your VAT liability significantly
This is where the VAT652 form comes in. You can submit it online or by post. Online is quicker and lets you attach digital records, but both are accepted.
In your form, be as clear and detailed as possible. Include:
What went wrong, and how you discovered it
The correct VAT figures
Which period(s) are affected
Supporting documents (e.g. stock purchase records, sales invoices, margin calculations)
If HMRC believes the mistake was genuine and you acted quickly to fix it, penalties may be reduced or even waived altogether under their "quality of disclosure" guidelines.
However, if the error appears to be part of a pattern or stems from poor internal controls, you could face a compliance check or even a penalty for failure to take reasonable care. That’s why it’s always better to come forward than wait for HMRC to find it themselves.
How do I prevent VAT Margin Scheme errors in the future?
1. Review your eligibility process.
Always double-check that the goods you’re putting under the Margin Scheme actually qualify. Items bought with a VAT invoice, new goods, or items imported into the UK typically don’t qualify. HMRC has a simple guide on what goods can and can’t be included.
2. Separate your stock and records.
Keep margin scheme items completely separate from standard-rated goods in both your accounting system and your physical inventory. Confusion between the two is one of the most common causes of incorrect VAT returns.
3. Train your team (or yourself).
If anyone else in your business handles purchases, sales, or bookkeeping, make sure they understand how the scheme works. A single misinformed invoice or margin miscalculation can impact multiple returns down the line.
4. Do regular internal checks.
Set time aside monthly or quarterly to review VAT returns, margin calculations, and supporting records. Catching issues early gives you the chance to correct them before HMRC does.
5. Work with VAT-experienced professionals.
The Margin Scheme is a niche area of VAT, and not every accountant is familiar with it. At Rhombus Accounting, we specialize in helping second-hand car dealers, jewellers, and watch dealers across the UK keep their VAT processes tight and error-free.
A little attention now can save you from penalties, backdated VAT bills, and awkward letters later. And when HMRC sees that you’ve taken reasonable care, they’re much more likely to take a fair and cooperative approach.
Conclusion
Mistakes happen, especially with something as technical as the VAT Margin Scheme. But what really matters is how quickly and properly you fix them. Whether it’s a small calculation error or a more serious misstep, correcting it early can help you avoid penalties, interest, or a full-on VAT investigation.
At Rhombus Accounting Firm, we help second-hand businesses like yours stay on top of their VAT obligations, correct errors the right way, and avoid repeating the same mistakes. If you think something’s gone wrong with a past return or just want peace of mind for the next one, we’re here to help.
Contact us today to find out how we can support your business and help you stay on top of your finances.
Thanks for reading!
Meet Lewis
Lewis is a professional accountant and founder of Rhombus Accounting. He regularly shares his knowledge and best advice here on his blog and on other channels such as LinkedIn.
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