How to do your VAT

Computer Keyboard Technology Office Work Equipment
Computer Keyboard Technology Office Work Equipment

In the last article we discussed the various systems available for farmers to help them meet the Making Tax Digital regulations.

This week we look at what’s involved in ‘doing your own VAT’.

First of all what paperwork is necessary to enable VAT to be reclaimed? All claims for VAT must be on the basis of a VAT Invoice. VAT cannot be claimed on the basis of a proforma invoice, a dispatch document, a delivery document, or any other document apart from a VAT invoice. A VAT invoice should have clearly show it is an invoice, include the name of the supplier, date, invoice number (although occasionally this may be blank) the VAT number of the supplier and either the total invoice amount including VAT or the total before VAT and the VAT amount then shown separately. Without a VAT invoice, VAT cannot be reclaimed.

George Megarry from TGM Software Solutions says that an example of a common mistake made by users is for a user to claim VAT back on the basis that it’s understood that VAT was included in the payment. For example, a mobile phone bill includes VAT. Often this is paid by direct debit from the bank. George says some users take their bank statement, read the amount charged by the mobile company, calculate the VAT amount and include this on the VAT return, without having the original VAT invoice.

This won’t pass a VAT inspection and anyone who has done this may be required to repay the VAT claimed. If the amounts concerned are significant, the claimant could face penalties. A problem with mobile VAT invoices is that you often have to log into your online account and wade through a menu system to actually find the VAT invoice, but without doing this and downloading the invoice, the VAT cannot be reclaimed. Likewise if an invoice is lost, then you must get the supplier to send a duplicate.

In relation to the supplier invoices, make certain that there is actually VAT to reclaim. Many farm inputs are zero rated. Meal, silage, straw and land rent are examples of some inputs which are zero rated. If the invoice for the goods does show either a separate VAT amount , or has an indication that the total includes VAT, then you can’t claim back any VAT on those inputs.

What about the private use element of some inputs? For example, electricity, telephone and fuel? The private element should be discussed with your accountant in order to determine a reasonable percentage to deduct from the VAT return for private use. Electricity is an interesting example. The larger element of the electricity bill may be subject to 20% VAT while the remainder may be subject to 5% VAT. VAT for private use, is charged at a lesser rate than VAT for business. But it may be worthwhile discussing with your accountant as to whether or not you could claim part of the 5% section on your VAT return, if the breakdown on your electricity invoice seems to allocate a higher than expected amount to the 5% private rate of VAT.

Assuming that the farmer has all the purchase invoices gathered up for the VAT period, what’s involved in actually submitting a VAT return to claim back the VAT due? That’s where the new regulations come into play. The details of the VAT invoice must be entered to a computer program of some sort. This can be a home developed spreadsheet for those who know how to set up and maintain a spreadsheet, or an off the shelf package purchased to do the job.

No matter what computer package is used, the user will be required to record the invoice details – supplier, invoice date, invoice number, details of the goods, amount before VAT and VAT amount. The package should then add up the total for all purchases and sales.

The computer package should have an option to ‘submit VAT return, which when the user selects, should connect to the internet, send the totals for sales and purchases to HMRC and receive a receipt back – the whole process in submitting the return should take under a minute.

Under the new regulations, there are three options a farmer has in relation to submitting VAT returns:

1. Use a homemade spreadsheet (your accountant or other advisor may assist with this), in combination with what is known as bridging software.

2. Use the services of a book keeper or your accountant to enter the VAT invoice details for you in a package and submit your VAT returns for you

3. Purchase a package, enter the sales and purchase invoice details and submit the VAT return yourself.

If you go for the third option, then a few questions worth considering before you commit to purchase a package:

1. Does the software company have experience of farm financial recording?

2. Is there telephone and online help available to help a new user get started?

3. Is it a flexible system for entering data or strictly controlled? For example, some systems force the user to match payment with individual invoices. Some systems are flexible and allow you to enter a payment to a supplier without specifying which individual invoices are being paid. Allocating payments to individual invoices entails additional work by the user. Often VAT returns are being completed late at night when the day’s work on the farm has been finished and the less work and time it takes to complete a VAT return, the better.

4. Does the software handle deductions in a simple way? For example, when animals are sold at market, the farmer receives payment for the animals less deductions, some of which may have a VAT element which is reclaimable. Some software systems force the user to enter the sale of animals in a sales section and the deductions get entered in the purchase section. Some farm software packages, designed with this sort of entries in mind, allow the user to enter the sale followed by a negative line for the deductions. This is simpler and allows the user to check the final total after deductions.

5. Farmers often negotiate discount when paying for items – how does the software handle allocation of discount?

6. If a mistake is entered, how easy is it to find the entry and correct it?

7. Is the software ‘Cloud’ based, or installed on the user’s computer? This is particularly important in areas with intermittent and/or poor broadband speed. Cloud based software systems require stable internet connection, while computer based software requires no internet connection at the time of entering data and only a brief connection at the time of the VAT submission.

The Kingswood Accounts software supplied by TGM Software Solutions Hillsborough has been used by farmers in Northern Ireland for over 20 years. A new simple ‘VAT only’ version has been released as an alternative to a spreadsheet system for users who want the reliability of a professional package combined with the simplicity of entering data in a spreadsheet manner (row by row). TGM has experienced staff to set up the system prior to installation so it is tailored to suit the particular farm type. At the higher end of the scale, farmers participating in any benchmarking system or wishing to do their own on farm benchmarking, can go for the Kingswood Enterprise version, allowing full costing for each farm enterprise – dairy, beef, sheep, young stock, etc UFU members qualify for a full 16 months of support and help included in the purchase price of the system.