▶ How do I correct a transaction with the incorrect VAT amount in the previous year?

How do I correct a transaction with the incorrect VAT amount in the previous year?

If you discover a transaction with an incorrect VAT amount from the previous year, you'll need to correct it in the current year. As your year-end accounts and VAT claim/return for the previous year would already be complete, you can't amend the transaction in the previous year. Instead, you should make correcting entries in the current year.

(If the VAT error is in the current year, correcting entries can be made).

To correct an entry from the previous year

1. Re-enter the transaction exactly as it was mistakenly entered in the previous year, but with minus values. For instance, if the original incorrect entry was a payment of £200, enter a payment in the current year for -£200. Avoid entering the correction as a receipt as this would inflate the value of your receipts. Be sure to add a note to the transaction explaining the correction and referencing the original transaction.

2. Enter a new transaction with the correct amounts and again, add notes to explain and reference the related transactions.

Though this correction shouldn't affect the total value of the invoice/transaction (it would've been noticed when the bank reconciliation didn't match), the overall values of the two transactions will cancel each other out. When you carry out the next bank reconciliation, simply select both transactions to show them as cashed and clear them from the list.

However, the net values of the two transactions will differ. Depending on the significance of the amount, you may need to mention it in a council meeting or to the auditor at the year-end.

As the VAT amount was incorrect for the transaction in the previous year, the VAT return/claim would also have been incorrect. This will correct itself when the next return/claim is completed in the current year, as the correcting transactions will be included in the next calculation.