On the standard invoice accounting scheme, VAT from invoices Credit the VAT control account and VAT on bills Debit the VAT control account. Therefore, the VAT control account should always give a true reflection of how much VAT is due to HMRC (or due from).
The VAT widget on the dashboard displays an amount of VAT owed to HMRC building up (or owed from HMRC), this is the difference between Credits and Debits on the VAT control account. If you click on the amount shown in the widget, you will be re-directed to the VAT control transaction report.
Box 3 on the VAT return should equal the total Credits on the VAT control for the same date range. Likewise, Box 4 on the VAT return should equal the total Debits on the VAT control for the same date range. A VAT reconciliation would involve comparing the transactions on the VAT return to the transactions on the VAT control for the same period of time, to find missing/incorrect transactions.
Before launching into this comparison there are a few things to check:
- Have you accounted for the opening VAT liability correctly?
- Has the HMRC VAT bill been created (if you are using the VAT journal option - has the VAT journal been created)?
- If you have created the payment to HMRC manually - have you coded this to the VAT control account (or VAT Payable, if you are using the VAT journal option)?
Once you have checked the above is correct, you can begin reconciling your VAT control account to your VAT returns. It is always advised to start from the first quarter as any incorrect balances are brought forward and can be difficult to identify over time.
Head to the Reports > Popular reports > VAT return menu.
Select the first Quarter Ending VAT return, in this example, it will be Quarter Ending March 2015.
In a new tab head to Home > Dashboard and click on the VAT owed to HMRC building up figure.
This will re-direct you to the VAT control transaction report - in the filters, change the dates to match the dates of the first VAT return quarter you have open in the other tab.
Compare Box 3 on the VAT return to the total Credit balance on the VAT control - make sure to deduct the HMRC payment from the total if this appears in the VAT control Credit list.
If the values match then move on to Step 6; in the above example, these values do match.
If the values do not match, compare the invoices on the VAT control in Boxes 1 and 2 against the Credit values on the VAT control account to find the discrepancy.
In this subsequent example, as you can see the credit balance is £7618.75 which is larger than the Box 3 figure by £7618.75 - £5952.08 = £1666.67. In this case, you will have to compare the invoices in Box 1 and 2 to the transaction report to identify any invoices, journals or purchase refunds which are contributing to the discrepancy. The usual cause for this would either be that these transactions were recorded after the VAT return had been created or, that the transactions were added with the incorrect date.
In this case, if the reason was the former, you should tick on 'Include Late Invoices' when running subsequent VAT returns to include these invoices. Therefore, when performing the next VAT reconciliation for the first and second VAT returns with the VAT control report for the first 2 Quarters, the credit balances will recognise the VAT element of the late invoices. In contrast, if the reason was the latter, transactions with the incorrect invoice date can be identified to be amended with the correct date.
Compare Box 4 on the VAT return to the total Debit balance on the VAT control - make sure to deduct the HMRC payment from the total if this appears in the VAT control Debit list.
If the values match then move on to Step 7.
If the values do not match compare the invoices on the VAT control in Box 4 against the Debit values on the VAT control account to find the discrepancy.
You will then need to move on to the next quarter and repeat Steps 4, 5 and 6 and continue moving to each quarter in turn until the VAT control Debits and Credits match boxes 3 and 4 of the current return.
Once you have completed a VAT reconciliation, it is best to lock your reporting periods up to (but not including) the current reporting period on the Settings > Periods menu to prevent any changes to transactions.
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