Promotional material

VAT reporting (part 7)

Updated 25 September 2024

Read purpose, scope and audience (part 1) and general approach to VAT compliance controls (part 2) of Help with VAT compliance controls — Guidelines for Compliance GfC8, if you have not already.

This section is relevant for invoice VAT accounting, and covers VAT reporting control objectives for:

• organisational unit structure
• general ledger posting
• Making Tax Digital regulations
• VAT reports
• consolidation of return figures
• manual adjustments
• reconciliation checks
• good practice risk-based checks and trend analysis to gain reasonable assurance

Organisational unit structure

Organisational units are used by IT systems to represent the structure and hierarchy of the business. For the purposes of this guide VAT reporting is considered to be part of the record-to-report (R2R) financial process (which is a separate part of these guidelines). Examples of organisational unit structure that may be seen in a R2R context include:

• company code
• cost centre
• profit centre

The primary purpose of organisational units is to provide segregation in reporting. Company codes provide trial balances for financial statements and are typically the key organisation units in defining the scope for VAT reporting.

Control points

1. Company codes should accurately reflect UK VAT registrations.
2. Organisation hierarchy should accurately map to VAT group and divisional registrations.

General ledger posting

Most posting to the general ledger (GL) will be generated from transactions in the sales and purchases sub-ledgers. For larger organisations the sub-ledgers could be components of an integrated ERP system. Alternatively, the sub-ledgers could be components of other systems from which transactions would be posted to the GL through an interface.

Control points

1. All tax codes are accurately mapped to GL VAT accounts for output tax and input tax.
2. Transaction tax-point date is used for VAT reporting.
3. Currency conversion method is acceptable where GL operating currency is not sterling.

General ledger direct journal postings

Direct journal postings are those transactions that are created within the GL (so not sourced from sub-ledgers). They will typically be either directly input or uploaded from a pre-formatted spreadsheet. Some of these manual journals may have a VAT component.

Control points

1. Direct journals should require authorisation, with appropriate segregation of duties.
2. Direct journals should be input by appropriate staff with restricted access control.
3. Use of master adjustment templates with pre-embedded formulae should be available for re-occurring adjustments and refreshed periodically to reduce the risk of manual error.
4. Direct journals should be accurately described.
5. VAT values are coded and calculated correctly.
6. VAT is posted to the correct VAT account (particularly if manually assigned).
7. VAT values are captured and included for VAT reporting.
8. The correct tax-point date is captured and used to report VAT.
9. Unposted journals with reject or hold status should be investigated promptly.

Making Tax Digital

Functional compatible software, as defined by Making Tax Digital (MTD) for VAT provides a means of:

• keeping and maintaining the digital records specified in the MTD regulations (an ‘electronic account’) — for more information read Making Tax Digital for VAT (VAT notice 700/22)
• preparing VAT returns using the information maintained in those digital records
• communicating with HMRC digitally through the Application Programming Interface (API) platform

Organisations must make sure that they are aware of and compliant with the current MTD legislation.

Control points

1. The ‘electronic account’ contains the information required in the regulations.
2. Data transfer or exchange within and between systems must be digital where the information forms part of the ‘electronic account’.
3. The system can provide complete, accurate and timely population of the ‘electronic account’ from the sub-ledgers.
4. All types of reverse charge are accurately identified and applied to relevant transactions and automatic posting of output and input tax is used, where possible.
5. the system (which can include an API-enabled or API-bridged summary spreadsheet) can correctly produce and submit VAT returns from the ‘electronic account’.

VAT reports

Many systems will use the tax code structure as a reference for determining in which VAT Return box both net and VAT values are recorded. Alternatively, some systems use ‘document type’ or other parameters to drive which transactions are included in VAT reports.

Control points

1. VAT compliance procedures are documented in a process note, regularly reviewed and kept up to date.
2. VAT reporting is MTD compliant.
3. Records included in reports are complete to allow accurate VAT reporting.
4. Reports are extracted in a timely manner (automatically, where possible).
5. Reports are extracted in a consistent format.
6. Reports are extracted in a format compatible with MTD to allow digital linking to meet the MTD requirements.
7. VAT reporting dates align to the VAT reporting period.
8. Old or invalid tax codes are disabled for VAT reporting.
9. Document types are correctly aligned to VAT return box categories.
10. Tax codes (and their associated totals) are correctly aligned to VAT return box categories and are easily identifiable.
11. Changes to tax codes or document types have been captured correctly.
12. VAT reports should provide a clear, understandable audit trail.
13. A sales VAT report, which forms part of an electronic account, should include the tax-point, value and VAT rate of supplies made.
14. A purchases VAT report, which forms part of an electronic account, should include the tax-point, value and input tax claimed on supplies received.

VAT Return consolidation

Consolidation can refer to the collation of sales, purchases and other reports necessary to calculate the box totals for the VAT return. For larger organisations with different business units (sometimes part of a group registration) consolidation includes bringing together internal VAT reports (individual returns) to form a group summary. 

Control points

1. Internal VAT reports are checked and authorised.
2. All internal VAT reporting units are included.
3. All VAT group member internal returns are included.
4. All disregarded intra-VAT group sales are excluded from the VAT return, ideally through automatic identification and reporting.
5. Intra-VAT group transactions during periods of membership changes are checked.
6. Internal returns are digitally linked to the VAT group summary.
7. Any third-party reports (such as outsourced VAT reclaims) are included, with due diligence performed, as appropriate.
8. All acquisitions and disposals within the period are accounted for.
9. All manual adjustments are included.
10. Master templates are available for VAT summaries to reduce the risk of error.

Outsourcing due diligence might include:

• researching the trading history and reputation of the third party before engagement
• researching the current market share and reviews from existing customers
• obtaining the profiles and qualifications of third-party agents
• obtaining testimonials or references from the third party
• checking if a tax agent is a member of a professional body or adheres to the Professional Conduct in Relation to Taxation (PCRT)
• performing a ‘sense check’ on any VAT reports provided by the third party

Spreadsheets are commonly used in the consolidation of return figures and can represent significant risks with potentially large Impacts resulting from errors or omissions. Addressing spreadsheet risks could include the following:

• using a professional or trained developer for complex spreadsheet designs
• ensuring the design and functionality of more complex spreadsheets are adequately documented and updated as necessary
• testing new spreadsheets before ‘go live’
• testing using auditing tools to check the design, logic and accuracy of calculations
• effective training for users, deputies and for succession planning
• rigorous version control to prevent out-of-date spreadsheets being used
• automatic linking and updating rather than copy, paste or manual input
• use of control totals and reconciliations for key numbers
• drop-down pick lists rather than free entry
• protected areas or cells to prevent overwriting
• access to spreadsheets should be restricted to authorised users
• regular back-up of spreadsheets to reduce the risk of loss and unavailability

Specialised tools which focus on automating VAT reporting and filing are available and might be appropriate for some businesses seeking to reduce the risks associated with spreadsheets.

We provide more information on outsourcing VAT compliance and reporting in Outsourcing (part 9) of these guidelines.

Manual adjustments

VAT adjustments occur in the normal course of business or may relate to irregular one-off transactions. The totals of each type of adjustment must be kept in functional compatible software and the supporting calculations must be kept as an audit trail for any adjustment made.

Calculations for adjustments may lie outside the normal accounting system, for example in pre-formatted templates or bespoke spreadsheets, which should be regularly reviewed and authorised.

Manual adjustments are discussed in more detail in VAT reporting — manual adjustments (part 8) of these guidelines. Common adjustments are listed in the control points (these are neither prescriptive nor exhaustive).

Control points

1. Accruals adjustments are calculated and reversed correctly.
2. All direct GL Journals which are relevant to VAT reporting are included.
3. Partial exemption adjustments are included.
4. Capital goods scheme adjustments are included.
5. Bad debt adjustments are included.
6. Repayment of input tax (clawback) adjustments are included.
7. Import VAT is deducted as input tax and C79 is used as the primary evidence for VAT reclaim (where it exists).
8. Import VAT is declared as output tax, and also deducted as input tax where postponed import VAT accounting (PVA) is used, and PVA statements are held as evidence.
9. Fuel scale charges are included and based on current data.
10. Applicable VAT corrections from previous returns are included, subject to the rules on correcting those errors on a current return.
11. VAT corrections do not duplicate previously submitted error correction notices.
12. One-off supplies such as the sale of business assets are included.

Examples of good processes established for import VAT include:

• when accounting for import VAT on the VAT return as output tax under PVA, the system automatically posts the equivalent value of input tax
• using the PVA method of accounting for imports from the relevant date and using only the PVA method to avoid inconsistencies in import VAT accounting

Reconciliation checks

VAT accounts will be held within the GL chart of accounts. The two common configurations for these accounts are:

• a one-account configuration in which a single VAT account is used to record all VAT relevant transactions, including payments to HMRC.
• a three-account configuration, which consists of separate input tax, output tax and VAT control accounts

The latter is more common with larger business systems. The VAT control account is used to cleardown balances on the other two accounts and is cleared itself with the payment to HMRC.

Control points

1. Sales and purchases VAT report totals should be reconciled to the GL VAT accounts, with differences satisfactorily explained and documented.
2. ‘Special purpose’ VAT accounts, for example for journals, partial exemption or non-deductible VAT should be included and reconciled.

Risk based checks on transactions

Risk based checks form part of the detective control framework for VAT reporting. A detective control is a check that operates after a process has completed, for example a cash reconciliation.

The number of checks required will vary depending on the size and complexity of the organisation.

Standard exception reports (or automated checks) may be available from the accounting system or may be custom designed by the user.

Control points

1. Records of the checks performed each period should be maintained.
2. Any changes made should be logged with appropriate comments and be easily identifiable.
3. Changes are reflected in accounting systems where required.
4. The appropriateness of checks done should be kept under review and revised if necessary.

Reports or tests that might be useful in gaining assurance for VAT reporting are listed here (these are neither prescriptive nor exhaustive). These scenarios represent some common sources of risk and error but may also identify transactions where the VAT treatment is correct:

• large input tax claims
• large purchase values without input tax
• foreign currency input tax
• foreign supplier of services with no reverse charge
• duplicate postings
• large nil VAT sales
• inter-group transactions with VAT
• sales with unusual VAT rate (for example, larger than standard VAT rate)
• VAT-only transactions
• nil VAT sales and UK customer
• nil VAT sale with UK goods delivery
• nil VAT sales with standard rated product
• standard rated VAT and nil-VAT product
• standard rated VAT and foreign customer
• invoice dates out of period
• large nil VAT purchase credit notes
• large VAT sales credit notes
• document type not sales or purchases with VAT
• non-deductible input tax, for example on business entertaining or blocked goods
• part-exchange transactions
• cross border transactions
• management charge transactions, for example are these re-charges or a taxable supply
• land and property transactions

Common assurance challenges include:

• assurance checks being considered for the complete range of systems and processes feeding into the VAT return, such as minor and manual billing, journals and staff expenses
• potentially greater risks with the tax codes of new in-period products, customers or suppliers and these should be selected for review
• assurance checks on products or services where the tax code has been changed in-period should be selected for review
• an over-reliance on simple ‘top 10’ checks, or automated checks, could identify only a small number of dominant customers or suppliers. A stratified approach (selecting one transaction from many major suppliers or customers) gains greater assurance coverage
• considering substantive follow-up checks when errors are found within a particular transaction. These could include, for example, examining all similar transactions for the customer, supplier or product for a longer time period
• where automatic duplicate checks might rely on one unique reference or field – checks should contain sufficient key fields, or different combinations of fields, to pick up possible duplicate records. ‘Fuzzy match’ options (approximate match) can be successful in picking up near matches that actually refer to the same variable
• even-handed assurance — checking both under and over payments — should be the goal of a good system of control

Trend based checks on VAT totals

Analysing VAT trends is another form of detective control, providing a ‘sense check’ for the VAT period in terms of expected business activity, trading cycle or season.

Examples include:

• percentage check on output tax to period sales
• percentage check on input tax to period purchases
• total and percentage comparisons to previous VAT reporting period
• total and percentage comparison to same VAT period last year
• total and percentage comparisons per tax code to previous VAT reporting periods
• total and percentage comparisons per tax code to same VAT period last year
• top 10 customers trend
• top 10 suppliers trend
• net tax payment or repayment compared to forecast
• payments on account compared to forecast
• check reason for net tax repayment if unexpected for period

VAT return submission

Control points

1. Relevant checks are performed by a reviewer in line with the process note to ensure VAT Return accuracy, including but not limited to ensuring that all relevant checks and controls were completed.
2. VAT Return is signed off by authorised individual before submission.
3. Submission is made in line with the API requirement.
4. A sense check of the figures reported per the VAT workings and the figures displayed for submission through the API is carried out prior and post submission to HMRC.
5. Full audit trail of end-to-end VAT preparation process is available and saved for every VAT return submitted.
6. Returns are submitted on time (on or before the due date).
7. Submission receipt and submitted return are kept in line with record keeping requirements.
8. VAT return periods are closed down in VAT compliance software to restrict changes post submission to HMRC.