We always strive to reassure clients that VAT accounting is straightforward and relatively easy, provided you diligently follow the well documented rules. The HMRC recognise that even with the best intentions, mistakes happen. So they do not require to be even informed if a incorrect return has made provided the amount involved does not exceed £10,000 and the error is rectified in a following VAT return within a reasonable time frame.
We set out below a some of the "dos and don'ts" of accounting for VAT.
What is meant by keeping 'proper' VAT records?
A simple summary of what constitutes proper VAT records would be:
- A detailed sales day book (SDB) which summarises the daily sales transactions, that in turn can be traced though to individual till receipts summary reports, or individual copies of customer sales invoices.
- A detailed purchases day book (PDB) which summaries the details of daily purchases and expenses incurred in the course of doing business, that in turn can traced through to copies of the individual receipts and supplier invoices.
- Detailed cash/bank/credit-card/petty cash day that record the funds received in, and paid out, in the course of doing business, including matching the sales receipts to the SDB invoices (via a sales ledger) and the settlement of PDB invoices (Purchase ledger).
- Detailed summaries of reimbursed expenses claimed and repaid to staff, which must be supported by valid receipts and invoices.
The general rule is that the HMRC requires VAT records to be kept for a minimum of six years. Under MTD rules those records must be maintained in the same digital format that links directly to the VAT submissions made. This prove to be a serious problem because as software evolves, the loss of backward compatibility becomes an increasing issue as time passes. We suspect many businesses will not even have working copies of the accounting software they used six years ago. If they do, there may be insurmountable operating system and version incompatibilities that prevent access to historical records. Then there is final barrier of finding the specific paperwork the HMRC have asked to inspect.
One of the most helpful developments of modern accounting software is the ability to link and save a copy of the source paperwork to every transaction, which is stored in the Cloud for future reference. This is a convenient way of satisfying the HMRC's requirement to maintain records for at least six years. There is of course the drawback that you are effectively locked into continuing to pay for the software in order to access the historical data even if you decide to adopt an alternative accounting system moving forward. There is also the risk that our general reliance on Cloud-based technology may fail us in the future for a variety of security concerns, or cyber-crime interventions.
Another factor that may sooner or later become a significant factor in deciding who the HMRC investigates in future, is it is immediately obvious which taxpayers are providing copies of supporting paperwork in their regular MTD VAT submissions, and those who do not. Providing the supporting paperwork does not contradict the tax treatment that should have been applied, it is reasonable to anticipate those who fail to provide any supporting documentation will receive more unwanted attention from the HMRC than those who do.
