The VAT return: surely that just follows from the records?

The ideal is a client who supplies all the right data and a return that simply falls out of it. That day is still a long way off. Even with limited information there are signals that should prompt you to ask questions.

The ideal looks like this: a client sends all the relevant and correct data straight from its records, whoever receives it transfers it directly into the filing software and submits the VAT return. Once the VAT in the Digital Age (ViDA) regime is in place and every taxable person issues or receives e-invoices and reports them digitally to the tax authorities, that picture comes into view. The tax authorities might even be able to prepare a pre-completed VAT return. But that day is still a long way off. Accountants and tax advisers deal with clients who generate all sorts of files themselves, on the basis of which the adviser is expected to produce a correct return.

To prepare a sound return, you really need all the underlying data and documents: purchase invoices, sales invoices, bank data and transport documents. Where those are not available, you have to make do with what you have. Even limited information allows for a number of observations that warn you further enquiries are needed. Here are some examples.

The format of the data

Clients usually supply the same dataset for every return. If the data for one period arrive in a different format, for example copies of ledger accounts instead of a spreadsheet, with or without a completely different layout, circumstances have evidently changed. Find out why. If the client has moved to new accounting software or reorganised its records, check whether the VAT coding of purchase and sales invoices is still correct. That matters not only for the return, it may also lead to an advisory engagement.

Turnover out of line

Take out the VAT returns for earlier periods. If the figures supplied differ substantially, some of the information may be wrong. Where turnover subject to output VAT (box 1a) is substantially lower than in previous quarters, sales data may be missing, for instance because the turnover of one of the companies in a VAT group has not been sent. There may equally be a legitimate reason: in our practice we also see sharp falls in turnover as a result of the conflict in the Middle East. Asking the question is always sensible.

Costs out of line

Data can be missing on the cost side too. A one-off large refund may follow from an investment, but an unusually low amount of input VAT compared with earlier quarters may mean the client has not supplied everything.

Here too there may be a legitimate explanation. One client received invoices from a Dutch transport company for a quarter in which, because of a software fault, the zero rate had wrongly been applied to every invoice instead of 21% VAT. In any event, input VAT that looks too low is a signal to contact the client.

Imbalance between inbound and outbound flows of goods

Whoever prepares the return can draw up a quarterly and even an annual overview of all inbound goods (boxes 2a, 4a, 4b and 5b) and all outbound goods (boxes 1a, 1b, 1e, 3a and 3b). You would normally expect turnover to exceed costs (gross profit). If turnover is substantially higher, goods may be missing on the inbound side, unless the margin is enormous, which for some products it genuinely is. If the inbound flow exceeds turnover, either stock is being built up (unlikely for perishable goods) or turnover is missing. In short, an imbalance between these flows is a reason to contact the client.

We are happy to think along on compliance questions, on tools that help return preparers spot VAT issues, and on training in this area.