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A 5-Step Guide to Keeping the Tax Man Happy

VAT Returns and Tax Accounting

HMRC run a tight ship when it comes to VAT returns and tax accounting, imposing tough fines and implications for tax evasion. But doing things by the book can result in a tax inspection if things don’t add up so it’s important you do things properly.

Here are 5 tips to follow to keep the tax man from the door:

  1. Keep an organised invoice log

The more organised you are with your invoicing, the easier you will make life for yourself when it comes to doing your VAT return. Keep a digital copy of invoice numbers and ensure references are in a clear sequential order. Keep copies of your invoices in your accounting software and archive them once they are old. Back up your software and archive backups too. If you are doing a paper return rather than digital, keep invoices filed in a lockable, fire proof cabinet.

If you have missing invoices or invoices that have different amounts to your income, you will most likely be investigated for the discrepancy.

  1. Record your expenditure as you go

There’s nothing worse than going through a mountain of receipts at VAT return time, to find out what was spent and why. Record your expenses weekly or monthly and ensure you have all relevant receipts to back up the expenditure. Keep a record of mileage as you go and ensure dates are clearly marked on all the expenses you are claiming for.

Any missing receipts against the amount you are claiming for is likely to trigger an inspection to verify whether the claims are genuine.

  1. Avoid using company funds for personal expenses

Whilst there is some discretion over personal expenditure, it’s best not to get into the habit of using your company to pay for expenses that are not business related. Milk this and you will certainly face an inspection.

If you use business funds to pay for personal items that are not considered discretionary, ensure you credit back the business. If you have used personal funds to pay for business expenses then ensure you clearly show this in your accounting.

  1. Know your IR35 liabilities

IR35 is a legislation that seeks to understand the relationship between a business and its contractors. If a business is paying for contracted staff then HMRC wants to be clear they are not recruiting in that manner to avoid paying employee tax. It’s important that both the business and the contractor understands if they could be deemed as an employer by the number of hours they work, amount they get paid and any benefits they might receive.

If the parties are unable to disprove that it is an employer/employee relationship then they could be liable for a fine and be subjected to different tax implications.

  1. Send your VAT return on time

Late returns raise alarm bells. If you are late in returning your VAT then you will enter a 12-month probation period known as the ‘surcharge period’. Further late payments will incur a fine and if you fail to return your VAT full stop, you will be liable for a prison sentence.

Get familiar with your VAT return obligations and get organised ahead of time. The best way to do this is to stay on top of things throughout the year to minimise the workload at return time.