Getting the VAT return right: Boxing clever

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Now that much of HMRC’s checking is carried out by computers, Neil Warren explains how advisers can reduce the risk of visits and enquiries by ensuring VAT returns are completed correctly.

Sales - outputs

There are two boxes on the VAT return that relate to the sale of goods: box 6 and box 8. The box 6 entry relates to worldwide sales made by the business for both goods and services, but box 8 is only relevant if a business sells goods that are sent to other EU countries.

Here are two common errors with these boxes:

Some clients think that if a sale is recorded in box 8, then it is left out of box 6. This is incorrect. Box 6 includes the kitchen sink, so to speak – see next section.

Box 8 is only relevant to the sale of goods to EU customers where the goods leave the UK. It is always left blank in relation to the sale of services. I have seen some concerned taxpayers over the years who have made entries in Box 8 for services and then been very confused when HMRC has sent them Intrastat returns for completion!

Example 1

Aunty Betty lives in Dublin and has ordered a computer from ABC Computers in the UK for her nephew’s birthday, who lives in Manchester. Even though an invoice is being raised to a customer based in another EU country, the sale is excluded from box 8 on ABC Computers’ VAT return because the supply of goods is only within the UK. It will be recorded in box 6 in the usual way.

Box 6 – inclusions and exclusions

I think box 6 is very important and it is worthwhile to check that it is consistent (as far as possible) with the turnover shown on annual accounts. So here are a few exclusions and inclusions:

Inclusions

The basic guidance is stated in HMRC Notice 700/12, section 3.7 re Box 6 :“Show the total value of all your business sales and other specific outputs but leave out any VAT.”

Zero-rated and exempt sales

I always enjoy telling the tale of a butcher client who had a query from HMRC about his VAT returns: “The problem was that I had left the meat sales out of Box 6,” he told me. As his only trading operation was as a butcher selling meat, which is zero rated and thus in box 6, I wondered what he had included in Box 6? Answers on a postcard, please.

Outside the scope sales

This is the one that often gets forgotten. As an example, if I sell services to an overseas business customer that is outside the scope of UK VAT under the general business to business: B2B rule (place of supply being the customer’s country), I still record the income in box 6 of my return. The same applies to goods sales. If I buy goods from a Chinese supplier and they go directly to my customer in Japan, then the sale and purchase are still recorded on my VAT return. This is because a ‘supply’ has still been made. This makes sense because I can still claim input tax on any UK costs I incur that are relevant to the deal.

Exclude from box 6:

Donations, grant income and dividend receipts – these sources of income will be particularly relevant to charities and not for profit organisations.

Insurance claims

Purchases and inputs

Box 7 records the total value of purchases made by a business, and box 9 records the value of EU purchases of goods. The same principle applies to box 9 as to box 8, i.e. never include any services in this box.

The main tip with box 7 is to exclude wages and salaries and the related payments for PAYE and National Insurance contributions. It also excludes drawings for sole trader and partnership businesses, as well as dividends for limited companies. Local authority rates is the other important exclusion.

Negative figures

How do you cope with the situation where you have issued a major sales credit note to a customer (including VAT) and the output tax figure in box 1 is negative for a period? A similar issue applies to a big purchase credit in box 4.

This is not a problem: you enter a minus figure on the online return eg -1000.00 and if you are one of the few businesses that completes paper VAT returns, you put brackets around the written figure ie (1000.00). It is incorrect to increase the input tax figure for a negative output tax entry or vice versa for a negative input tax figure.

Conclusion

A worrying scenario I find is when an HMRC officer gets very excited about a deficiency of outputs on a client’s VAT returns in box 6, compared to the turnover figure recorded on the CT600 corporation tax return for the same period. The end result will be a lot of wasted time if a client has made a simple error in box 6, such as the one I mentioned above with my butcher client.

I know that it is more important to get the input tax and output tax figures right so that the correct tax is paid but don’t neglect the statistical boxes either.

 

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

Replies

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By Oppco
20th Sep 2017 10:18

Aren't there different Box 6 rules for those using the Flat Rate Scheme?

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to Oppco
25th Sep 2017 11:34

Flat rate scheme. As I understand it there is no requirement to enter outside the scope sales on a VAT return for those businesses on the flat rate scheme.

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By Tykva
28th Sep 2017 09:48

I'm a bit confused with entering outside the UK scope B2B sales into Box 6 because when processing such transactions i enter outside the scope and thus these figures do not appear on the return at all. For them to appear in Box 6, should they be zero-rated (0%)?

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02nd Oct 2017 23:30

As discussed in the article, a few years ago, 2010 - 2012 - so not a life time ago -I had a significant negative figure, mine was a large purchase credit - so box 4 was negative. I entered it as a - figure. HMRC online filing happily accepted the figure and acknowledged the submission.

I paid the VAT bill. I then received a refund of exactly double the negative figure. After a phone call to HMRC - I was told in no uncertain terms that you do not include negative figures as it causes a computer meltdown that reverses the figure. HMRC generously corrected the error for me.

I then received a demand, with a "black mark" for failing to pay the correct VAT on time, because they'd refunded part of it.
Has that situation changed, can you now use a negative figure on a VAT return?

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By annmd
24th Oct 2017 18:24

Hi, if the sales are B2C to other EU countries, does the business need to register for vat in other EU member countries or is it only when sales are B2B or not at all?

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