In the Construction sector, this can be a problem, not just between taxpayers and HMRC, but also between Contractor and his customer. Where a Contractor charges VAT at the standard rate, but the supply should be charged at the reduced 5% rate; what can the customer do?
VAT law states that VAT which is “chargeable” can be reclaimed, either on a VAT Return, or using a D-I-Y claim form. Thus, the difference between the reduced and standard rates cannot be claimed. The customer has to revert to the Contractor to correct the incorrect invoices, and also refund overpaid VAT. The Contractor will be able to reclaim this VAT on his own VAT Returns.
But, very often the problem is that of time limits, as errors take some time to come to light. The Contractor only has a four year window in which to adjust his VAT Returns. In some cases, the time limit rules leave HMRC with a windfall, when the customer can only claim at 5%, but the Contractor has accounted for VAT at the standard rate, but is out-of-time to make an adjustment.