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HMRC internal manual

VAT Small and Medium Enterprises Assurance Manual

Check on business activities: accounting system, adequacy of traders records and completion of VAT return

The following checks should be carried out:

  • question the trader to establish what type of records are maintained;
  • check that the VAT account is being maintained in a form that contains the required information. Detailed information on traders’ records and accounting arrangements is contained in V1-24A trader’s records;
  • establish the audit trail to gain an understanding of the method of accounting employed;
  • the location of the VAT account, whether the accounts are computerised, and what records are used in the business, should be recorded in the ‘Accounts Details’ screen within EF;
  • if material changes affecting computer classification are discovered you should make every effort to complete the inspection, then refer to the Audit Service with as much information as possible to assist possible re-classification for future use;
  • if you are unable to complete the audit because of computer related problems you should complete whatever checks are possible. You should then explain to the trader that the inspection is not complete and what you still need to do, and then contact the Audit Service for advice; and
  • identify, by discussion and observation, the full range of business activities and confirm that the records and VAT account cover all aspects of that business. Some traders may have great diversity of business. Some activities are so far removed from their trade classification that they are wrongly disregarded. It is the trader’s responsibility to ensure that all trading is declared. It is no defence to blame their professional adviser for any omission. You need to be vigilant, to ensure your enquiries cover all activities.

You should confirm whether the trader’s accounting arrangements ensure (or will ensure) that:

  • tax is properly accounted for on all business activities including movement of capital assets and any additional forms of income;
  • the correct tax point is applied;
  • tax paid on goods and services received is properly recorded;
  • a trader with non-business activities, for example a charity or an organisation with income from grants or donations, does not treat as input tax the VAT on goods and services for non-business purposes;
  • only input tax which is properly deductible is claimed;
  • if the trader is partly exempt, taxable and exempt outputs are clearly distinguished, as is the corresponding input tax;
  • tax is properly accounted for on imported goods, on goods removed from bonded warehouse for home use, and on certain services received from abroad;
  • evidence is held for items generated as exports;
  • credits received, or issued, are separately identified in the appropriate input and output records; and
  • the records are comprehensive and the VAT account is properly set up and maintained.

Any apparent deficiencies in the records should be pointed out to the trader, confirmed in writing and a note made on the report form that this has been done. You should establish the signatories to the VAT returns. They should be:

  • a director or the company secretary of a limited company;
  • a partner, or a sole proprietor; and/or
  • a person duly authorised by one of the above.

You should also ascertain what checks are made to ensure the accuracy of such returns. This should be recorded in the EF audit report.

  • every effort should be made to secure compliance with the official requirements set out in the public notices; and
  • the need to preserve records for the statutory period of six years should be pointed out. This will be recorded on the EF audit screen. Any concessions to the six-year period (V1-24A Trader’s records) should be recorded in EF.