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VAT record keeping

20/04/2017

During a visit from HMRC you were told that your VAT records weren’t up to scratch and that unless you improve them you could be fined. Is this correct and what exactly do the rules require?

Record penalties

Over the last few years HMRC has been making a lot of noise about businesses keeping good records. Since 2011 it has backed this up with a special programme of business record checks. Plus, to make sure you toe the line there’s the threat of fines of up to £3,000 if your records don’t make the grade. These can be levied under the direct tax (income and corporation tax) self-assessment rules, but there’s a separate record-keeping penalty of up to £500 relating to VAT.

Additional VAT requirements

For the purpose of direct taxes your general accounting records will be sufficient to keep HMRC happy. However, it’s more picky when it comes to VAT. In addition to your usual records you must keep:

• a VAT account – broadly this is a record of how the figures on each VAT return are arrived at
• copies of VAT invoices issued by your business
• 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.

Tip. You’re allowed to convert and store all the above documents etc. in digital format, e.g. by scanning and saving documents received or by creating PDFs. However, if you want to do this you must obtain permission from HMRC first.

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.

VAT status on sales

Invoices you issue must show certain information, e.g. your registration number, the rate of VAT charged and the tax point (the date on which VAT counts as charged).

Time limit

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. In the case of land and buildings you might need to keep documents for 20 years. Tip.  You can ask HMRC to shorten the period if storage is a problem for you. This might be so if and when your business ceases to trade. Your application must be in writing.

If you follow the rules above you won’t have trouble with HMRC. However, should it take exception for any reason, it will usually issue a warning, which won’t have retrospective effect, before it fines you.

HMRC can fine you up to £500 for not keeping proper VAT records. These must include a record of how you arrived at the figures on your VAT returns. They must also be ordered so that documents relating to each amount of VAT claimed or charged can be correlated with your accounting records.