From a financial perspective, your output VAT grossed up should equal one’s revenue amount, right? Mathematically it is expected, but in practice there are many reasons that it will not work on the first attempt and we see these issues at every one of our clients:
- Exempt or zero-rated sales: these will not have output VAT, so need to be removed from the revenue number before reconciling.
- Tax codes not applied to each revenue transaction: a sale is vatable supply and should have a tax code. Those without, because someone forgot to assign the code, changed it to an incorrect code or didn’t account for VAT on a tax coded transaction, all cause the reconciliation not to work.
- Credit notes: the offset of credit notes in the financial data may cause a reconciliation difference because they are best recorded in line 12 of the VAT return.
- Manual journals: VAT ought to be an effect of a transaction and not a direct manual journal to the output VAT account. Where there is output, VAT accounted like this, such as a fringe benefit, are to be removed before doing the reconciliation to revenue.
The above all depend on the specific situation for that client and require a detailed understanding of each difference in the following manner:
- What is the output VAT effect?
- What amount does it affect? Which amount does it not affect?
- The direction of the difference, does it make sense?
Some only regard this reconciliation as a necessity for an IT14SD or external audit, but it is an important business check to perform. Does your output VAT talk to what your business is selling?
Best practice is to do this reconciliation monthly as a standard procedure in preparing your VAT return and not as a by-product. So that you’re ready for an IT14SD request should it come. We see the most proactive finance managers adopting this reconciliation as a check in the VAT return process.