The first step to keeping out of trouble is to understand
the basics of the paperwork required. The second step is to
ensure accurate financial records are maintained and many
types of accounting software and bookkeeping software can
assist by at the very least producing a required audit
trail to support the financial figures entered on the
quarterly vat tax return.
To determine the need for accuracy and compliance it is
worth first summarising the work a vat inspector might
carry out when the business is visited to carry out an
inspection of the business financial accounts.
While each customs and excise inspector might tend to
conduct the audit in their own way typically the totals for
several quarterly tax returns will be compared with the
total sales turnover and total expenditure to indicate if
the returns are likely to be accurate. In addition cash and
bank accounts may be examined to determine if the volume of
payments and receipts also reflects the scale of financial
transactions.
Having put the overall financial position into perspective
the vat inspection will involve selecting several previous
quarters which will be audited in more detail. The number
of quarters and the choice of quarters are likely to be
dependent upon the quality of accounting records being
maintained and the overall view of accuracy.
It is quite normal for the inspector to select the most
recent vat return to audit plus a second quarterly return
submitted in the previous 12 months and potentially a third
quarter from a period in the previous 2 years. Any unusual
figures shown up from the audit overview are more likely to
determine which quarters will be examined in detail.
In examining each quarter the vat inspector will establish
the audit trail and verify the totals making up the
financial figures declared on the value added tax return.
Individual amounts making up the audit totals would then be
checked by individually checking sales and purchase
invoices in addition to most major amounts.
Some items selected for audit during the inspection will be
checked through to the cash and bank accounting records.
Many items of major financial significance and items of a
repetitive nature will also be audited through to final
receipt of money from the debtor receipts and creditor
payments.
Several sales invoices and purchase invoices will be
selected by the inspector for tracing through the debtor
and creditors accounts to ensure that customer or supplier
has also entered the same transaction into their financial
accounts.
This cross checking with third parties is also likely to be
carried out as the inspector is likely to have details of
transactions from third parties which he expects to find
recorded in the business vat accounts being inspected.
Maintaining records of the value added tax is an essential
accounting function required from the accounting or
bookkeeping software employed. Getting the basics right can
help considerably to avoid the minefields that lay in wait
for those businesses that fail to address the subject with
sufficient importance.
A first step should be to ensure sales invoices are issued
for each sale and a copy of that sales invoice is retained
and accurately entered in the financial accounting records.
The design and information contained in the sales invoice
should comply with the value added tax rules.
The details to be shown on a sales invoice are a sequential
number to uniquely identify the invoice and the date issued
which is the tax point, business name and address, customer
name and address, vat registration number, a description of
the goods and quantity supplied, the percentage charged and
the amount of output vat.
The accounting software employed and used to record the
sales invoices should produce an audit trail for both
output tax and input tax on purchase invoices received.
Should errors be discovered after the quarterly return has
been submitted which total less than 2,000 the correction
can be made on the next available quarterly tax return. If
an error exceeding 2,000 pounds is discovered the customs
and excise office must be informed in writing
There are a multitude of errors made in the accounting
records supporting the quarterly vat return. Using a
proprietary brand of bookkeeping or accounting software can
eliminate many of these errors and produce an audit trail
which at the very least gains the respect of the vat
inspector.
The vat inspector will find checking easier and having been
presented with an audit trail has greater confidence the
value added tax liability declared is more likely to be
accurate.
Common areas where errors occur in recording sales vat
output include charging value added tax on sales of
business assets, supplies and gifts to employees at reduced
prices, not accounting for the full sales price when an
item is taken in part exchange, including vat on credit
notes.
Errors reclaiming vat inputs on purchases occur because
businesses claim value added tax when a proper vat receipt
has not been obtained, claiming input tax on entertainment
expenses which is not allowed and also claiming input on
vehicle purchases. Businesses may not claim vat on imported
goods until the vat certificate has been received.
Finally an area which confuses many small business owners
is the correct recording and treatment of under and over
assessments of the tax. These items should be accounted for
as receipts or payments into or out of the value added tax
due account and not entered in the sales and purchase
records.
If these assessments are entered into the sales ledger or
purchase ledgers the items will appear in the figures
produced for the quarterly return which is wrong. It is
wrong because the value of the under or over assessment
will effectively be doubled up.
The quarterly vat return should be signed and dated by the
business owner or a designated responsible official who
verifies that the tax return is correct and is legally
responsible for the accuracy when signing the return.
----------------------------------------------------
Terry Cartwright at DIY Accounting provides Accounting
Software that automates the vat return at
http://www.diyaccounting.co.uk/ for self employed business
at http://www.diyaccounting.co.uk/Selfemployed/vat.htm and
small limited companies.
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