One of the most important tasks for any business is making sure you remain tax compliant at all times. Navigating the various types of taxes and ensuring your books are in order can be tricky and time-consuming, but accounting software like Xero can greatly expedite and simplify tax compliance.
Xero offers numerous features related to tax compliance, one of which is its automated VAT return. Xero will calculate and file your value-added taxes, which is crucial if you’re doing business in most of the world, including the United Kingdom. However, in order for your Xero VAT return to be correct, you’ll need to make sure you’ve entered all the relevant information and carried out a few checks to confirm that everything is in order.
Step 1: Reconcile Your Bank Accounts
Before submitting your Xero VAT return, you’ll need to reconcile any bank accounts associated with your business. This process involves comparing your internal records (such as ledgers, chequebooks, or other financial records) with your bank statements to confirm that your internal information is consistent with the bank’s records. You’ll want to check both incoming payments and outgoing expenses, as each of these feeds into the VAT calculations. Any discrepancies could lead to omissions or irregularities in your VAT return.
Step 2: Run the VAT Audit Report
Xero offers a feature that generates a VAT audit report — a detailed accounting of all your transactions, along with their tax codes. This audit report gives you the opportunity to scan through your entries and identify any issues that may need to be corrected. These might include duplicated entries, items with incorrect rates or missing tax codes, or any other problems.
Step 3: Review Your VAT Coding
In some cases, you may only use the standard rate for your VAT coding, but many businesses will use multiple VAT codes for their transactions during an accounting period. It’s important to take some time to confirm that you’ve got the correct codes entered for all your transactions. It’s a good idea to do a little research and familiarise yourself with which types of products and services qualify for differing codes such as Reduced Rate and Zero Rate, as this will help you check your coding more efficiently and accurately.
Step 4: Review Your Three-Month Profit and Loss Statement
Xero allows you to generate a rolling three-month profit and loss report, which sets out your expenses, revenue, and net profit over your most recent three-month window. It’s a good idea to review this report regularly, and one such occasion is before submitting a VAT return. Take some time to go through this analysis, paying special attention to any unexpected spikes or dips that might indicate an omission, a double-entry, or an unusual purchase or input. In addition to catching an outright mistake, you may also notice an expense — such as entertainment — that might not qualify as VAT-deductible.
Step 5: Reconcile Late Claims
From time to time, you may receive a late invoice, and you’ll need to make sure these invoices are properly accounted for in your VAT report. Xero’s software manages late claims and attempts to classify them within the correct accounting period, but it’s a good idea to double-check them to ensure they’re being reported in the right period.
Keep in mind that there is a distinction between a late invoice and an invoice that you may have omitted or recorded incorrectly in a previous accounting period. These have different reporting requirements and should not be treated interchangeably.
Step 6: Verify Your MTD Settings
If you’re doing business with any companies or customers in the United Kingdom, you’ll need to ensure that your return is compliant with MTD (Making Tax Digital). MTD mandates certain standards of record-keeping, and you’ll need to file your VAT return with the correct registration number. Xero should automatically set up your VAT return to be MTD-compliant, but it’s a good idea to double-check before submitting.
Step 7: Confirm the Scheme You’re Using
You have the option of using either the Standard Scheme or the Flat Rate Scheme (FRS), assuming you qualify for the latter. The FRS offers a simplified VAT accounting process that can expedite reporting and provide a more predictable VAT payment, but it is only available to small businesses below a certain turnover threshold. Be sure you’ve indicated the correct scheme within Xero’s software.
Step 8: Check Your Record-Keeping
It’s possible that your business will face a VAT audit at some point, and you’ll want to make sure your record-keeping is in good standing should that happen. Xero helps you keep your records in order, but it’s a good idea to take a moment to check that you have everything you’d need in the event of an audit — including all invoices, bank statements, a general ledger of transactions, and any other relevant information.
Xero’s software greatly expedites accounting, and that includes creating and filing a VAT return. Whilst Xero automates and streamlines much of the process, it’s vital that you carry out this sequence of checks and verifications to confirm that the information you’re submitting is complete and accurate.
Need expert support managing your VAT returns and beyond? At UW Accountancy, our Xero accountants Stockport team is here to ensure your books are always accurate and compliant. Whether you need help with your self assessment tax return, reliable payroll services Stockport businesses can count on, or you’re considering a move business to Dubai from UK, we’ve got you covered. Our dedicated accountants Stockport businesses trust are ready to take the stress out of your finances. Get in touch with us today to find out how we can help your business thrive.
