Things You Need To Know Before The VAT Inspection

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. Read more »

An Introduction To Registration And Accounting For Value Added Tax

When the sales turnover of a business reaches the vat threshold, currently 64,000 pounds per annum until reviewed in April 2008, then registration for vat is compulsory. If financially beneficial, businesses can register for vat prior to sales turnover reaching the vat threshold.

When a business registers for vat it becomes responsible for charging vat at the correct percentage on every sales invoice and transfer of goods and services and also maintaining accurate financial accounting records of the vat charged hat are subject to vat inspections. If the sales turnover has breached the vat threshold that business is liable for the vat on sales even if it has not charged the customer.

The vat charged to customers is called output tax and the VAT on purchases is called input tax. When a business has registered for vat in addition to maintaining records of sales and input tax it must also keep accurate financial records of purchases and input tax in order to calculate the vat payment to be made. The amount of vat to be paid each quarter is the difference between the sales output tax and the purchases input tax and is paid quarterly to HMRC.

Specific types of business transactions are exempt from vat such as insurance and loans. If the business only supplies exempt items then the business cannot register for vat to reclaim the input tax paid on purchases. Read more »

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