Your Guide to Keeping Records for VAT

Managing VAT can seem a bit scary, but keeping accurate records doesn’t have to be the stuff of nightmares. Whether you’re new to VAT registration and want to know more about how VAT works, or just looking to make your process a bit more streamlined, we’ve put together this guide to help.

We’ll walk you through everything you need to know about keeping records for VAT. With a little know-how, you’ll find staying on top of VAT records is not only manageable but brings you peace of mind too.

Let’s dive in to the (not very exciting) world of VAT record-keeping. Jazz hands are optional but encouraged.

Do I need to keep VAT records if I register voluntarily?

Yes, even if you signed up for VAT registration before reaching the mandatory threshold, you’ll need to keep records

What records should I keep for my VAT return?

Your VAT return tells HMRC about the tax you charge on your sales and pay on purchases, so keeping very clear, organised records will make the process much easier.

These normally include the details (and copies) of sales and purchase invoices, credit notes, and receipts relating to both your income and any expenses – whether VAT was charged or not. It’s just as essential to keep records of transactions which don’t include VAT so there aren’t any gaps in your accounts.

If VAT was included in the transaction, you’ll also need a detailed breakdown of the VAT rate charged, and what it was charged on. For instance, the product or service you supplied or received, and where it was supplied to or from.

It’s also useful to store any corresponding documents which back up your records, such as copies of invoices.

Keeping your VAT records up-to-date and stored safely will make submitting your VAT return much less stressful. It will also help to keep you on the right side of HMRC’s rules, so although VAT record-keeping is dull to read about and anxiety-inducing to actually do, getting it sorted will be a big help.

How should I keep VAT records?

Making Tax Digital (MTD) rules mean VAT-registered businesses must keep their financial records digitally, and submit their VAT returns using compatible MTD software. There are currently two ways you can do this:

What is bridging software?

Quite literally, bridging software bridges the gap between VAT records and submitting them to HMRC.

You’ll still need to keep digital records, but bridging software means you have the option to use digital systems like spreadsheets or databases for record-keeping, even if they don’t have a direct connection to HMRC.

Bridging software takes the data from your spreadsheets or accounting software, converts it into a format that meets MTD standards, and then submits your VAT returns directly to HMRC. This way, you can carry on using the tools you’re familiar with while still staying compliant with the new digital requirements.

It’s not perfect, and the use of bridging software might be reviewed as HMRC marches on towards a digital future. But, if you already use spreadsheets for your accounts, then it might save you the time and cost of upgrading to a completely new accounting system.

What’s the best VAT software to use?

We’re serious professionals so we’ll say this entirely depends on your needs and circumstances (rather than screaming “Pandle”).

All-in-one accounting software streamlines your whole financial process, from invoicing to record-keeping and VAT submissions, by keeping everything in one place. This means you don’t have to juggle lots of different programs or work out how to transfer data between various systems.

As a comparison, non-MTD software generally requires more manual effort and might not meet the current legal requirements, putting your business at risk of getting into hot water with HMRC.

There are lots of MTD VAT software providers to choose from, spanning a range of budgets. So even if you did start your business so you could spend time on bookkeeping, it’s well worth comparing what features are available to speed things up and make life easier.

Are there any penalties if I get my VAT return wrong?

If you do make any mistakes on your VAT return, the consequences will depend on the nature and size of the mistake. Unfortunately, you’re likely to face penalties for not complying with MTD, as well as penalties for not submitting or paying your VAT bill on time.

Penalties for compliance failures can range from a set amount per missed return to more serious fines if you repeatedly don’t follow the rules. The fine usually depends on the severity of the mistake and whether it was intentional or accidental, and you might also need to pay interest on the amount of VAT you still owe.

Not being compliant could also mean HMRC looks more closely at your wider tax affairs, which can be stressful even if you haven’t done anything wrong!

Keep accurate records, double-check your return before submitting it, and tell HMRC as soon as possible if you spot any mistakes.

Good record keeping habits are a must for any business. Learn more about how we can help with our cloud-based bookkeeping software, and take Pandle for a spin today.