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Our top tips for keeping good VAT records

Good housekeeping in the ‘financial’ sense is essential for keeping on top of your bookkeeping and VAT records.

1. Keeping trading records in good order

Not only must you keep the records HMRC wants, but they must be ordered in a way that the document can be found in the event of an inspection. Throwing receipts into carrier bags won’t cut it with HMRC.

While there’s no method set by the rules, you should have a system that allows you to pinpoint each document (invoice, receipt, etc.) used to arrive at each figure on the VAT return

Tech Tip

  • Use Xero to run your accounts and record sales

2. Keep VAT records to hand

Keep a separate folder (electronic or paper) containing:

  • A copy of your VAT registration certificate
  • Copies of any correspondence with HMRC
  • Copies of submitted VAT returns

3. Monitor your VAT account

Broadly this is a record of how the figures on each VAT return are arrived at:

  • xxx      VAT on sales
  • xxx      Less VAT on purchases
  • xxx     = the amount of VAT owed to HMRC

If your business is small and your transactions few – you can keep your records in a spreadsheet. We would always recommend managing your records in an accounting system such as Xero where you have a more robust audit trail and some protection against accidental loss or destruction.

Here you will be able to look at all the debit and credit entries that make up your VAT account and ‘drill down’ into the transactions that make up your VAT return – whether you are cash or accrual accounting for VAT or operating a VAT scheme such as the Flat Rate Scheme.

4. Create sales records

You must keep copies of all VAT invoices issued by your business showing:

  • your VAT registration number
  • the rate of VAT charged
  • the tax point (the date on which VAT counts as charged)
  • a description of the supply

Self-billing agreements – this is where the customer prepares your sales invoice (their purchase invoice) on your behalf:

  • name, address and VAT number of any self-billing suppliers
  • copies of all self billing agreements – reviewed annually

5. Keep records of all your purchasing activities

You must keep copies of all receipts and purchase invoices issued to your business showing:

  • original VAT invoices or similar evidence of VAT paid on purchases
  • export documents relating to overseas trade
  • credit notes and other documents that alter the value of a supply.

HMRC will accept electronic copies of documents as evidence, so long as the following information is visible:

  • your business name on the invoice; you can only recover VAT on invoices issued to your business specifically (or the VAT registered entity if you are a sole trader)
  • the suppliers’ VAT registration number
  • the rate of VAT charged
  • the value of VAT charged (look out for zero rated or exempt elements of the invoice – do not assume that the whole invoice is a vatable supply)
  • the tax point (the date on which VAT counts as charged)

Receipts will not show your business name and often don’t show the VAT separately. You can calculate the VAT included in the total receipt value if the suppliers’ VAT number is shown on the receipt.

As at the time of writing. the VAT rate is 20%; making the VAT Fraction £X / 6 (Not to be confused with £X / 5) as this is inclusive of VAT

For example, if the receipt value is £12, then £12 / 6 = £2 VAT (£10 + £2 VAT)

Tech Tip

  • Use Xero to run your accounts and record purchases
  • Use Receipt Bank to send scanned, snapped or PDF invoices and receipts into your accounts system
  • If you don’t want to pay for a Receipt Bank subscription, consider using Xero Files to capture your invoices and receipts into Xero.

6. Stuff that might catch you out

You will also need to keep records of:

  • items you can’t reclaim VAT on – e.g. business entertainment
  • any goods you give away or take from stock for your private use
  • bad debt write-offs; and the proper reclaim of VAT
  • VAT claimed on mileage

Tech Tip

  • Use Tripcatcher to generate accurate mileage records and VAT calculations

7. Record retention

Oddly, while the time limit allowed to HMRC to adjust return forms is four years plus the current return period, you must usually keep VAT records for six years (or 10 years if you use the VATMOSS service).

Tip: In the case of land and buildings you might need to keep documents for 20 years.

You can keep VAT records on paper, electronically or as part of a software program (e.g. book-keeping software). Records must be accurate, complete and readable.

If you have lost a VAT invoice or it is damaged and no longer readable, ask the supplier for a duplicate (marked ‘duplicate’).

You can ask HMRC to shorten the period if storage is a problem for you. This might be the case if and when your business ceases to trade. Your application must be in writing

And finally, if quite frankly you have better things to do with your time such as making sales and running your business than do the admin yourself – consider outsourcing it to an accountant or bookkeeper!

Your admin nightmare is our day job!

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