The HMRC overview of Making Tax Digital contains: “The improved accuracy that digital records provide, along with the help built into many software products and the fact that information is sent directly to HMRC from the digital records, avoiding transposition errors, will reduce the amount of tax lost to these avoidable errors.”
Do digital records really improve accuracy though, or do errors still slip through the net? Many of these are probably found (and corrected) by the accountant when reviewing the records and preparing the accounts. However, with potentially thousands of lines of data, to review them all is nigh on impossible.
So where can it go wrong? I would contend probably the biggest errors are caused in postings to predefined expense accounts with VAT at 20% as the standard VAT type, so that all entries to that account have VAT extracted. The purpose is to help speed up data entry, but not all transactions fall into the VAT inclusive category.
The VAT rate can generally be overwritten, and indeed needs to be in many cases, so care is needed. However, inexperienced staff may just allocate it and not consider the VAT aspects. Motor expenses is a prime example – fuel and repairs are probably fine, but there is no VAT on road fund licences, motor insurances or MOTs.
We recently corrected an error where the client had been reclaiming VAT on the last 6 months HP payments and a deposit on a van. He had posted these to motor expenses with 20% default VAT. The whole of the VAT had in fact been reclaimed on entering the purchase invoice itself. Net £2800 to repay to HMRC. This was quite easy to spot.
A client decided they did not need any help setting up their software, and when they did seek help, wondering why the VAT repayable was such a huge figure, it transpired they had set standard rated VAT on all accounts – so had reclaimed VAT on wages payments, PAYE, drawings and on a VAT payment itself! A fine mess to sort out!
Another client had two businesses and one VAT registration. Sales from one business to another did not have VAT charged, but in the other business it was posted to purchases, which also had a default 20% VAT, so VAT was being reclaimed. Again, this was adjusted once found, and picked up each quarter subsequently. Despite advising the bookkeeper on numerous occasions, she still continues to get it wrong and needs correcting every quarter!
VAT on expenses is another area where it is easy to go wrong. With expenses apps, the claimant is generally responsible for entering the data and coding it, and they are not bookkeepers or accountants. A train fare and taxi fare is coded as travelling…..right? Travel has a default 20% so any postings to here have VAT extracted!
It is not all one way. Sometimes VAT is not claimed. There are tools available which scour data entries and highlight possible anomalies. We ran this on a client recently – there are thousands of lines of postings every quarter. It highlighted that there were 15 postings to rent which were standard rated and 5 items which were zero rated. On investigation, it was found that the zero-rated ones had been wrongly coded and should have been standard rated. Net £4,000 additional VAT to claim back!
Would any or all of these errors have occurred if the records were maintained manually? Possibly – possibly not? Who really knows?
What errors do you come across? What errors do you think digital records have reduced or even eliminated?
There is a very short “unofficial” survey here and your feedback and comments would be appreciated.