Every business within the European Union is required to keep VAT records on paper, electronically, or as part of a software programme (such as QuickBooks).
They should be retained for 10 years from the end of the year in which the transaction was made, no matter if they stopped using the scheme. In some countries, such as Italy and Hungary, accounting demands can prove to be challenging. Records that should be kept by a taxable person include information like the Member State of consumption of the supply, the type of supply, the date of supply, and the VAT payable. Let’s not forget about more specific details, such as info about payments on accounts.
Good recordkeeping is crucial from a financial standpoint. If you’re registered for VAT, please keep in mind these actionable tips.
Keep good VAT records from the beginning to end
With tax officials vowing to scrutinise the affairs of those that have outstanding payments, it’s never been more important to keep good VAT records. You have to keep full and genuine records of all business transactions that affect or may affect your liability to VAT, ordered in a way that can turn out helpful in the case of an inspection. You should be able to answer the questions of the tax authority in detail and, in some cases, provide alternative evidence. Put simply, the records should be organised and kept in an orderly fashion. This will help you and your accountant – if you use one, of course.
Use QuickBooks to Run Your Accounts and Manage Sales
QuickBooks accounting software can help you stay VAT-compliant. It automatically does calculations for you on your invoices and receipts. Using software will allow you to submit VAT returns directly to the tax authority, without needing to visit their website. In the United Kingdom, from April 2022, all VAT-registered businesses will have to comply with Making Tax Digital. Small businesses, as well as self-employed professionals, will have to complete digital tax records and file digital returns. The initiative of the HMRC is designed to make sure the tax system is effective and efficient for all parties involved.
If You Use One Or More of These VAT Accounting Schemes, You’ll Need Different Records
The standard VAT accounting scheme is guided by the rules pertaining to accrual accounting. For the sake of clarity, it’s an accounting method that makes it possible for a company to record revenue prior to receiving payment for the goods or services sold. Financial activities are documented as they take place, regardless of when payment is realised. If you use one or more of the following accounting schemes, you’ll need to keep different records:
- Annual accounting scheme: This simplifies your paperwork. You must complete a return once a year.
- Retail and VAT margin schemes: If you sell directly to the public, you can calculate the Vat you have to record in your account per day or week.
- VAT cash accounting scheme: You pay VAT the moment that customers pay you.
- Limited cost trader: There are restrictions on the goods and services you can include for the calculation if you want to stay at a lower rate.
- Reverse VAT charge scheme: If you’re a subcontractor, VAT isn’t charged on the sales invoice. If you’re a contractor, you record the reverse charge VAT when you receive the invoice, and VAT is declared as both a sale and purchase.
As the law imposes many obligations, you may want to seek expert advice from an accountant.
To Claim Refund for A VAT You Paid, You Need an Invoice
If you’re charged VAT on business activities in a European country you’re not established, you may have the VAT refunded by the tax authorities in that country. To claim a credit for a VAT, it’s necessary to have an invoice. A photocopy of the invoice isn’t accepted, which is why it’s necessary to have an original or a duplicate marked by the supplier as a “Duplicate”. To get a refund, you have to send an application to the tax authorities where you incurred the VAT. Some countries will only grant a refund if your home country has similar arrangements.
If the invoice is issued in a foreign currency, it must present the corresponding figures in Euro. Equally, it’s crucial to use the selling rate recorded by the Central Bank. It sets the rates for countries within the monetary union, helping regulate the money in circulation and keeping inflation under control. The good news is that you’re allowed to use an alternative method to determine the exchange rate. The law requires you to keep original copies of VAT invoices. Make a monthly summary of the invoices, in order of the dates of issuance.
Add Up the VAT In Your Records Systematically & Put the Totals in Your VAT Account
At the end of the month, you have to do journal entries. More exactly, you need to make a summary of the input VAT and output VAT for each tax period. It’s recommended to put the totals in your VAT Control account under headings such as VAT payable – output tax (sales, errors in earlier returns, benefits, goods given away or taken from your own private use) and VAT deductible – input tax (purchases from taxable supplies, imports of taxable supplies). If you use QuickBooks, you should know it’s not currently possible to display the individual VAT percentage as an amount per line.
The VAT accounts should be kept separate from business income and expenditure. The details of the financial transactions are recorded on the return, which is sent to the tax authority. As a rule, this is done every quarter. Deliberately filing a false tax return or another document is illegal. Deliberately hiding revenues can bring about an unlimited fine, not to mention a loss of reputation. Examples of tax evasion include but aren’t limited to non-reporting of trading income, cash or cryptocurrency transactions, and tax avoidance schemes. Even if you have no knowledge about it (an employee commits fraud), you’re still liable in the eyes of the law.