In the final part of his three-part series, Neil Warren considers how clients can avoid making common mistakes on their VAT returns.
The carrot and stick
HMRC would like to encourage businesses to get their VAT returns right in the first place, rather than make lots of errors which HMRC or tax advisers have to correct with VAT assessments, return adjustments or form VAT652 voluntary disclosure corrections. The penalty system, which has been in place since 2009, is based on the behaviour of the taxpayer and should encourage compliant behaviour.
This makes sense from all perspectives. So what can we, as tax advisers, do to assist this objective?
VAT creditor reconciliation
Computerised accounting systems are based on double entry bookkeeping, so a worthwhile check when a VAT return is completed each period is to ensure the VAT payable (or repayable) figure in box 5, reconciles to the VAT creditor or debtor balance in the nominal ledger as at the same date. Although you would expect this check to be automatic, it is not necessarily the case.
Think of the fun and games you have if someone forgets to ‘reconcile’ the VAT return system on the accounting software after it has been completed. How many accounting packages exclude VAT journals from the VAT report?
I know one accounts software programme (which I won’t name) that used to include the previous quarter’s VAT payment in the input tax figure for the following period.
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Get the first VAT return right
My personal view is that all tax advisers should encourage clients to let them review their first VAT return after they become VAT registered. There are many reasons for this, not least because many first period returns result in a VAT repayment, and thus are more likely to be queried by HMRC.
The things to watch out for on the first VAT return for the business are:
Pre-registration input tax
Has the client identified goods purchased within the last four years, which are still owned on the first date of registration, where input tax can be claimed on the first return? The same opportunity exists for services purchased within a six-month window before the registration date.
Has the client adopted the flat rate scheme or cash accounting scheme? With the flat rate scheme, has he considered the ‘limited cost trader’ category of 16.5% which has been in place since 1 April 2017? This new rule means it might be better to not join the scheme at all.
If the trader is using the flat rate scheme, has he claimed the 1% category discount he is entitled to in his first year of registration? Don’t forget that a flat rate scheme user can claim pre-registration input tax on his first VAT return in the same way as a non-scheme user.
Ratios between different boxes
If a business only has standard rated sales, the box 1 output tax figure should logically equate to the box 6 (outputs) figure multiplied by 20%. It is important to investigate any differences, which could be for very valid reasons. For example, box 1 might include error adjustments of less than £10,000 made on previous VAT returns, i.e. where the return can be corrected rather than the tax paid via a VAT652 disclosure form.
The relationship between box 7 (inputs) and box 4 (input tax) will not be as clear-cut, but any situations where the box 4 figure exceeds 20% of the box 7 figure should also be investigated. A common scenario I have seen is where import VAT is claimed on a big shipment in one period through a C79 certificate, but the overseas supplier invoices are not received until the following quarter. Encourage the suppliers to bill promptly is my tip here.
Finally, if the return shows an entry in box 9 (goods bought from other EU countries), there must be a corresponding entry in box 2 to account for acquisition tax, and the same amount claimed as input tax within the box 4 figure. Also, the box 8 figure for EU sales of goods should never be greater than the box 6 figure for worldwide sales.
Here are some final practical tips to consider that may make your VAT lives easier:
- Consider amending your client’s VAT periods so they coincide with their financial year, if this is not already the case.
- Get HMRC to send a reminder when the return is due. This can be done as a tick box option with the online registration facility. An email is sent about two weeks before the end of each VAT quarter, which will be five to six weeks before the deadline for submitting the VAT return.
- Pay VAT by direct debit, and benefit from an extra three working days before the payment is collected, compared to a normal electronic payment. This can translate into up to five calendar days extra if a weekend is involved. A direct debit means there is no worry about the payment limits for online banking, but the client must be sure the money is available in the account to pay the VAT on the due day.
- If the client cannot pay all of their VAT by the due date, encourage them to pay as much as possible and then contact the BPSS (Business Payment Support Service) to agree a time to pay deal for the balance, before the VAT is legally due for payment. This will then avoid a default surcharge for the period in question.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.