From XU Magazine, 
Issue 32

Standardising VAT Returns – Tips and Tricks for the Modern Accounting Firm

Explore a step-by-step framework to help improve your existing process

Does a pain-free VAT return really exist? Probably not – but they are manageable with a standardised system of checks.
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The domino effect

VAT returns are resource-heavy, time-consuming regulatory requirements. They’re not always the most exciting service you’ll provide to a client, but it’s one we know they value. As is the case with most compliance tasks, VAT returns come with a risk factor. If you file an incorrect return, the consequences can have a serious domino effect on both your clients and firm. 

1. Administrative burden

As you know, mistakes happen. In this instance, any errors you make on your previous VAT returns over the current reporting threshold could well mean a visit from HMRC – a visit no firm wants.

2. Stress and time

VAT inspections can be daunting. Despite the forewarning, there’s nothing that quite prepares you for a visit from an HMRC officer. They can go on for hours and disrupt your flow of work. I can say this through first-hand experience.  

3. Penalties and interest 

The stress of an in-person HMRC visit is soon put into perspective when the penalty lands. You may also find you have to offer your client a credit note against work previously undertaken that will impact your own margins. Finally, let’s not forget the uncomfortable, internal conversations that have to be had around how it happened in the first place.

4. Cash flow implications

If your client’s VAT liability has been under-declared, and that gets picked up by HMRC, it may result in an unexpected and non-negotiable outflow of cash. Alternatively, if the VAT liability was previously over-declared, then your client is left with a cash flow imbalance. That could lead to poor forecasting and even missed investment opportunities.

5. Reputational damage

There’s always a bigger picture to consider. Significant or multiple VAT mistakes could signal the end of your working relationship with a particular client. You may be disengaged with all work being moved to another firm of accountants, and word spreading may damage your reputation with existing and potential new clients.   

So, what can you do to make sure your VAT returns process is robust enough to avoid the risks mentioned above? 

Breaking the process down

As you well know, there’s plenty to do during a VAT return. So where do you start? To simplify the multiple checks and review processes, we can split the entire process into three subsections: 

1. The Buildup – the work you do before you start the VAT return 

2. The Return – what’s required while preparing the VAT return? 

3. The Pre-filing – final checks and reviews before you file 

By separating it into subsections, you can focus on the work that needs to be done at each stage. You also naturally introduce a step-by-step framework that your entire team can follow before moving onto the next check. That in itself is an excellent way to standardise VAT returns. With a recogniseable workflow that people buy into and understand, you can mitigate risk and increase efficiency. 

Let’s say one of your team is off sick or away on annual leave. Without a structure, the person coming in to help cover may be unsure of the status of that VAT return. But with a framework, employees can slot in seamlessly wherever they’re needed and get up to speed much quicker. 

The Buildup – Essential Checks 

The success of a VAT return often hinges on the work that goes in beforehand. At this stage, there’s plenty of things we need to keep an eye on to ensure that the actual VAT preparation runs smoothly:

  • Are bank transactions fully reconciled and do they contain all the transactions for the period?
  • Is the bank feed connected –  if not, when was it disconnected?
  • Are there any bank transactions without paperwork? 
  • Are there any paper transactions without corresponding bank transactions?
  • Does the bank statement balance in the accounting software actually match the period in review?

This is even more important when dealing with direct bank accounts as they can be prone to missing certain transactions. I’ve heard of examples where two months of transactions have gone missing. Once these checks have been done, you can move onto stage two. 

The Return – Essential Checks

The real VAT return starts now. And at this point, it all comes down to accuracy. That means checking the work, then checking again. 

Multi-coded transactions  

Specific suppliers are often coded with a tax rate to a specific chart of accounts code. Sometimes, this may not be the case or there might be multiple tax codes. These are often minor errors, but once we identify it and make it more accurate, it can result in an improvement in the net VAT position.

Duplicate transactions 

Check that there are no unwanted duplicate transactions that have been entered more than once in the period. As you know, this isn’t the most exciting task. If your clients do, however, provide you with regular bookkeeping, you can check for duplicates as that data comes in. 

Duplicate Contacts 

Duplicate contacts can cause duplicate transactions. Check that all transactions in the VAT period have the correct, accurate supplier information. Again, this is something that can be done when you receive a client’s bookkeeping.

Draft Invoices

This is particularly relevant for the Accruals scheme. We should always check that at the point of the VAT return being completed, there are no draft invoices in the accounting software that may need to be accounted for in the current VAT period. 

Reconcile Debtors and Creditors ledgers  

This is particularly important for clients operating on the cash basis for VAT, but it’s relevant for all VAT registered clients. As is the case with all these checks, look for irregularities and flag if you come across something that doesn’t look right. 

The Pre-filing – Essential Checks 

Your VAT return is now prepared. But the review process doesn’t end here. There are a handful of other things we need to look out for before we finally file the return. 

  • Check high risk account codes, like travel and entertainment expenses
  • Key ratio checks for VAT boxes 1-6
  • Check high value transactions – the higher the value, the bigger the risk
  • Reconcile VAT control account in accounting software (so the balance sheet is correct) 
  • Send queries to client
  • Confirm the VAT return is prepared (and balance)

Streamlining the process even further

With a set flow of checks, the VAT returns process is more than manageable. There is, however, one other thing to consider if you want to simplify it even more – technology. There will always be a manual element when it comes to VAT returns. Automated technology is an extra set of eyes, verifying your work throughout the VAT process.

Your clients may use data capture tools (like Dext Prepare) to provide you with real-time transaction processing. Or perhaps your firm is looking to add an extra layer of reliability with automated data checks (like Dext Precision). Either way, the key to standardising and enhancing compliance work lies in technology. 

Find out more about standardisation

If you enjoyed learning more about standardising your VAT returns, we’d love to show you where else it can help within your firm. Dext Precision is a process-improving data insights tool that deeply integrates with Xero and QuickBooks Online. Through automated quality checks, it shows you your client’s data analysis, as well as inaccuracies, and helps you correct them within seconds. You can build workflows and access reporting tools to create streamlined processes for your firm and inform better pricing. 

If you’d like to see our VAT return features and suite of data quality tools in action, simply click below to watch the webinar. Paul Lodder, the author of this guide, and Jonathan Gaunt, one of Precision’s founders, take you through a product demo and share the best examples of how Precision can help standardise and streamline your firm.

Why leave it there?

To find out more about Dext

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