Neil Warren discusses the checks a responsible business owner should make when reviewing VAT returns for their business which have been completed by another person.
Day at the office
Imagine you are the managing director of a business that employs ten people, including a part-time bookkeeper who completes the quarterly VAT returns. What checks should you do (if any) when the bookkeeper gives you a copy of the return for you to approve before it is submitted to HMRC?
Would these checks be different if, say, the company had received a suspended penalty from HMRC for past careless errors and the time period for the suspension was still in place?
VAT Notice 700/12: how to fill in and submit your VAT return, section 7, is headed “Things to check before you send your return”. It is mainly concerned with routine checks such as the VAT payable figure in Box 5 should equal the Box 3 output tax total minus the Box 4 input tax total. But this is a bit of a red herring anyway because the online VAT process automatically calculates the Box 5 figure without any human intervention!
Para 7.2 gives quite a lot of comment about payments by cheque, which is very much past tense in the world of electronic payments.
Credibility and consistency
If the director has appointed a suitably qualified bookkeeper, then they should not need to worry about the mechanics of the accounting system and individual transactions. The overall strategy should be to review the credibility of the return and ask the question: “Do the figures look sensible?”
The starting point for this question should be to compare the key figures with both the previous VAT return and the return for the same quarter in the previous year. Any significant variances can then be investigated. A director worth his or her salt will have a good idea in their mind whether business turnover is up or down in the current quarter compared to the previous period, and also whether turnover and profits are better or worse than in the previous year.
A company director of one of my private clients questioned a big VAT repayment on his company’s December return a couple of years ago, and his bookkeeper told him that this was to claim input tax on a big shipment of goods from China: “But the goods have not arrived in the UK yet,” he said, “so we can’t claim any VAT back.”
“But you’ve paid the Chinese supplier,” she said, “so I have claimed 1/6 of the payment as input tax.”
Her approach was clearly incorrect and the return was amended to remove this input tax before the return was submitted to HMRC. It will be claimed on a future return after the goods have arrived in the UK and the company holds a valid C79 VAT certificate issued by HMRC, ie as evidence to support its claim.
In another case, HMRC issued a “deliberate not concealed” penalty against an ice cream business for its September VAT period. The return in question was a repayment, the repayment being caused by lots of different errors. The HMRC approach was that the director should have expected a payment VAT return in his busiest period of the year unless he had spent a large amount of money on capital goods, which had not been the case. So by accepting a repayment return, he had deliberately submitted an inaccurate document.
If a business is within a suspended penalty period, then the stakes are much higher and this probably warrants the director spending more time reviewing the VAT return.
These are my top tips for specific checks to make:
- Is the Box 1 output tax figure equal to 20% of the outputs value in Box 6? If not, then is the difference due to zero-rated and exempt sales and, if significant, is the VAT liability correct for these sales?
- A quick review of the input tax report to identify significant claims on specific invoices. Is a proper tax invoice held to support these claims and is the claim being made in the correct VAT period?
- Are C79 certificates held to support input tax claims on imported goods?
- Has input tax been reduced on any purchase invoices overdue for payment by more than six months (this is a favourite check of HMRC compliance officers)?
- Have credit notes been dealt with properly (both sales and purchases) and have any claims for bad debt relief been made correctly, eg the sales invoice must be at least six months overdue for payment before a claim can be made?
There is an old saying: “if something seems too good to be true, then it usually is”.
A low payment or repayment VAT return might be welcomed by a company director with as much enthusiasm as a pack of Dobermanns who get their first lump of meat for a month, but the priority must always be to submit accurate returns at the first attempt (and on time). Anything else stores up a lot of potential problems for the future.
Don’t forget that HMRC can go back four years to correct errors, and that enquiry window is extended to 20 years if the errors have been made deliberately.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.