Things You Need To Know Before The Vat Inspection

Trained vat officers do inspect company accounts onGetting the basics right can help considerably to avoid
a regular basis and know exactly the types of errorsthe minefields that lay in wait for those businesses
likely to be uncovered. Up to date accounting recordsthat fail to address the subject with sufficient
are required by all vat registered businesses and mayimportance.
contain common errors and misunderstandings whichA first step should be to ensure sales invoices are
can cost the business dearly.issued for each sale and a copy of that sales invoice
The first step to keeping out of trouble is tois retained and accurately entered in the financial
understand the basics of the paperwork required.accounting records. The design and information
The second step is to ensure accurate financialcontained in the sales invoice should comply with the
records are maintained and many types ofvalue added tax rules.
accounting software and bookkeeping software canThe details to be shown on a sales invoice are a
assist by at the very least producing a required auditsequential number to uniquely identify the invoice and
trail to support the financial figures entered on thethe date issued which is the tax point, business name
quarterly vat tax return.and address, customer name and address, vat
To determine the need for accuracy and complianceregistration number, a description of the goods and
it is worth first summarising the work a vat inspectorquantity supplied, the percentage charged and the
might carry out when the business is visited to carryamount of output vat.
out an inspection of the business financial accounts.The accounting software employed and used to
While each customs and excise inspector might tendrecord the sales invoices should produce an audit trail
to conduct the audit in their own way typically thefor both output tax and input tax on purchase
totals for several quarterly tax returns will beinvoices received.
compared with the total sales turnover and totalShould errors be discovered after the quarterly
expenditure to indicate if the returns are likely to bereturn has been submitted which total less than 2,000
accurate. In addition cash and bank accounts may bethe correction can be made on the next available
examined to determine if the volume of paymentsquarterly tax return. If an error exceeding 2,000
and receipts also reflects the scale of financialpounds is discovered the customs and excise office
transactions.must be informed in writing
Having put the overall financial position intoThere are a multitude of errors made in the
perspective the vat inspection will involve selectingaccounting records supporting the quarterly vat
several previous quarters which will be audited inreturn. Using a proprietary brand of bookkeeping or
more detail. The number of quarters and the choiceaccounting software can eliminate many of these
of quarters are likely to be dependent upon theerrors and produce an audit trail which at the very
quality of accounting records being maintained andleast gains the respect of the vat inspector.
the overall view of accuracy.The vat inspector will find checking easier and having
It is quite normal for the inspector to select thebeen presented with an audit trail has greater
most recent vat return to audit plus a secondconfidence the value added tax liability declared is
quarterly return submitted in the previous 12 monthsmore likely to be accurate.
and potentially a third quarter from a period in theCommon areas where errors occur in recording sales
previous 2 years. Any unusual figures shown up fromvat output include charging value added tax on sales
the audit overview are more likely to determineof business assets, supplies and gifts to employees
which quarters will be examined in detail.at reduced prices, not accounting for the full sales
In examining each quarter the vat inspector willprice when an item is taken in part exchange,
establish the audit trail and verify the totals makingincluding vat on credit notes.
up the financial figures declared on the value addedErrors reclaiming vat inputs on purchases occur
tax return. Individual amounts making up the auditbecause businesses claim value added tax when a
totals would then be checked by individually checkingproper vat receipt has not been obtained, claiming
sales and purchase invoices in addition to most majorinput tax on entertainment expenses which is not
amounts.allowed and also claiming input on vehicle purchases.
Some items selected for audit during the inspectionBusinesses may not claim vat on imported goods until
will be checked through to the cash and bankthe vat certificate has been received.
accounting records. Many items of major financialFinally an area which confuses many small business
significance and items of a repetitive nature will alsoowners is the correct recording and treatment of
be audited through to final receipt of money fromunder and over assessments of the tax. These items
the debtor receipts and creditor payments.should be accounted for as receipts or payments into
Several sales invoices and purchase invoices will beor out of the value added tax due account and not
selected by the inspector for tracing through theentered in the sales and purchase records.
debtor and creditors accounts to ensure thatIf these assessments are entered into the sales
customer or supplier has also entered the sameledger or purchase ledgers the items will appear in
transaction into their financial accounts.the figures produced for the quarterly return which is
This cross checking with third parties is also likely towrong. It is wrong because the value of the under or
be carried out as the inspector is likely to have detailsover assessment will effectively be doubled up.
of transactions from third parties which he expectsThe quarterly vat return should be signed and dated
to find recorded in the business vat accounts beingby the business owner or a designated responsible
inspected.official who verifies that the tax return is correct and
Maintaining records of the value added tax is anis legally responsible for the accuracy when signing
essential accounting function required from thethe return.
accounting or bookkeeping software employed.