The jury is out at the moment as to whether digital record keeping really achieves a reduction in the “tax gap”. However, discussion of this is not the subject for the posting - perhaps another day. What digital records do make much easier is the possibility of running at least some automated validity checks across the transactions and finding those common errors.
This is not the case for all “digital records” – in a spreadsheet for instance, it may still be possible to transpose the net and VAT figures and it may not get noticed. (Some error checking cross -cast totals could be included but this does not often happen – especially in spreadsheets created by clients themselves). There is also no guarantee that the figures actually do “add up” – on numerous occasions we have seen that not all the rows have been included in the total range.
The use of data extraction products linked to the accounts software can help prevent duplicate entries – if an invoice with the same number is detected, a warning may be flagged. Where data is input manually this may not be the case – although it should come to light when reconciling purchase ledger accounts to supplier statements.
In such products, it is also possible to set up VAT rates or VAT Rules on a supplier basis – so this may help prevent errors.
However, these are not infallible, and it can also be very time consuming to check every line in detail.
One of the major online accounts software products has just launched “Smartscan” – adverts for it were all over the tube trains I travelled on this week. This looks at all the transactions and highlights potential duplicate transactions, inconsistent VAT Codes and missing transactions and anomalies.
There are also other Analytics tools that do something similar in other cloud software products. We used one for a client a few weeks ago. Whilst they use a data extraction product, the invoices from one supplier are confusing, and there are mixed 5% and 20% charges, and sometimes a brought forward figure on the invoice too – so the extraction does not always get it right.
However, the client’s bookkeeper just accepted them all as correct. The analytics tool flagged up that of 17 invoices, 12 had been coded with 20% VAT and 5 had been coded as Zero rated. Drilling down into them indicated that VAT at 20%/5% should have been reclaimed on the Zero rate invoices, and the 5% VAT had not been picked up on some of the other invoices. The total VAT involved on these and a few other anomalies was in excess of £4,000 additional VAT to reclaim!
There are still many VAT adjustments that clients do not always get right. Examples are: - the VAT Scale Charges which change every 12 months (or when there is a change of vehicle), reclaiming 100% of the VAT on leased vehicles rather than 50% etc. It may be possible for these types of error to be picked up by the data interrogation software at some stage….. we shall see.
In the meantime, these types of product will at least go some way towards getting the VAT “right”.