Things You Need To Know Before The Vat Inspection
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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
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
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
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
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.
About the Author
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
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Article Published/Sorted/Amended on Scopulus 2008-03-07 07:14:35 in Tax Articles