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Not every aspect of running a business is industry-specific. You need good “housekeeping” habits, particularly when it comes to your finances, bookkeeping, and VAT records.
1) Keep Your Trading Records Organized
You don’t just need to retain documents and records to meet HMRC’s requirements. Specific documents need to be easy to locate if there happens to be an inspection. (It will also save you plenty of hassle, too!) While the rules don’t dictate a specific organizational system, you definitely need to have one that works for you. VATGlobal suggest that every document that bears on a VAT return (receipts, invoices, and so forth) needs to be kept in an easy-to-locate file.
2) Create A Specific Repository For VAT Records
Make a separate folder (either paper or electronic) to hold your VAT documents. These include:
- Your VAT registration certificate (a copy is fine)
- Copies of all VAT returns you have submitted
- Copies of any and all HMRC correspondence
3) Keep Tabs On Your VAT Account
In the very broadest strokes, every VAT return involves putting numbers into a simple equation. The amount of VAT paid out on purchases is subtracted from the VAT on sales, and the resultant figure is the amount of tax owed to HMRC.
For small businesses with few transactions, you can keep track of this on a single spreadsheet. Even for the most modest enterprises, we recommend using a more robust accounting system (e.g. Xero) to track your VAT transactions. This delivers a measure of protection against accidental record loss and also builds a stronger paper trail for your business in case of an audit.
On a centralized spreadsheet, you have the ability to examine individual debits and credits to better understand the forces at work on your VAT return. A good VAT account record will prepare you regardless of your chosen method of paying – cash, accrual VAT accounting, or a VAT scheme like Flat Rate.
4) Hold Detailed Sales Records
Your business must retain copies of every VAT invoice it issues. These records must include:
- Your VAT registration number
- VAT rate charged
- The transaction’s tax point (i.e. the date the VAT counts)
- A clear description of what was supplied to the purchaser
Self-billing agreements, where you allow customers to prepare their own purchase invoices (your sales invoices), have additional requirements:
- All self-billing suppliers must be identified by name, address, and VAT number
- Copies of all self-billing agreements must be retained and reviewed on an annual basis.
5) Track Your Purchasing Activity
Every purchase invoice and receipt issued to your business must make its way into your records. To be valid, these records must include the following information:
- Evidence of VAT paid on purchases – original VAT invoices or similar
- Export documentation for international trade
- Credit notes and any other documentation affecting a supply’s value
HMRC now accepts electronic copies for formal use. Electronic copies do need to provide the following information:
- The name of your business – VAT can only be recovered if the invoice is issued specifically to your business (or VAT registered entity)
- Rate of VAT charged
- VAT registration number of the suppliers
- VAT value (look for individual elements on an invoice that are exempted or zero-rated. You must not assume that the total invoice is always VAT-able)
- The tax point (i.e. the date the VAT counts)
Receipts often lack the name of your business, and VAT is not always broken out as a separate figure. VAT can be calculated from the total value of a receipt as long as the receipt provides the suppliers’ VAT number.
The VAT rate is currently 20 percent. Do not use £X / 5 as your VAT fraction, as it is exclusive rather than inclusive. The proper inclusive fraction is £X / 6.
Example: On a receipt valued at £12, calculate £12 / 6 to find £2 VAT. (£10 value + £2 VAT)
If you need to inject PDF invoices or scanned or photographed copies of physical invoices into your accounts system, use Receipt Bank. Note that this is a premium service. Many accounting tools offer their own solutions. In Xero, for example, you can use Xero Files to capture receipts and invoices.