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HMRC internal manual

Compliance Handbook

Charging penalties: suspending penalties: setting suspension conditions: specific conditions: SMART examples: VAT example

VAT example

Number Description Action
1 How the inaccuracy arose As part of a compliance visit, in reconciling the VAT account the caseworker requested to see the purchase invoices for VAT period 2010/2011. The company’s bookkeeping system was all over the place, and did not provide cross referencing to the purchase day book (PDB). Retrieval of purchase invoices from the filing system was difficult and time consuming, some invoices were missing or mislaid.
  2 Specific conditions set - SMART criteria not met  To put this right the caseworker set the following condition

Copy invoices to be retained and be available when requested by HMRC

This is not a SMART condition because businesses are required to retain invoices by law under the normal business requirements.

  3 How to make the specific conditions SMART To make the above example SMART the caseworker needs the person to show the link between the input tax in their records and the input tax on their return. So the person must have a record of the input tax they are entitled to claim from business purchases.

Examples of suspended conditions in this case would be:

  • The business must show a clear link between the input records and input tax claimed. There must be a cross reference between the purchase invoice to the PDB and the VAT account.
  • A consistent method of cross referencing should be introduced by a specified date.
  • Invoices should be retained and filed in a chronological order that allows easy retrieval during an inspection or when HMRC asks for the information.

The process established to comply with this requirement should be incorporated into guidance for the bookkeeper by a specified date.

All the above conditions are Specific, Measurable, Achievable, Realistic and Time bound. It puts no extra burden on the business, but helps them to get tax matters right, and saves us time.

  4. Methods of checking the suspended conditions to ensure they have been met As above, to ensure suspension conditions have been met the checks can be made by:

Telephone/correspondence: Ask for details of the system introduced supported by copies of the current VAT account and extracts from the PDB with selected purchase invoices to ensure:

  • a cross referencing system has been introduced and implemented
  • the process introduced does enable tracking from VAT account to PDB to invoice and vice versa.

A copy of the instructions to the bookkeeper should also be requested.

The caseworker should issue a ruling to the business regarding retention of records, and as part of the call should seek an acknowledgement of the ruling from the business’ legal entity.

Visit: A visit to the business may be required to see the processes in place and how they are working.