A value added tax (VAT) system is to some extent self-policing, because the buyer of a service needs an invoice from the supplier so as to reclaim the VAT input tax on the purchase. It is therefore unlikely that the supplier could omit to issue an invoice in relation to sales to VAT registered customers.
The necessity to keep invoices and other evidence to back up the recovery of input tax places a responsibility on a business to ensure that record keeping is of a high standard. This means that not only will input tax recovery occur without a problem but that the business will avoid being liable to penalties.
Records are required to back up claims to recover input tax and to establish that goods have been exported so as to ensure that the export transaction is zero rated. Accurate records are also needed for bad debt relief claims, the issue of credit notes, VAT self-billing, and partial exemption situations. There are also detailed record keeping requirements for businesses operating VAT schemes such as the VAT retail schemes, the second hand goods scheme, annual accounting and the VAT cash accounting scheme.
Retention of VAT records
VAT records need to be kept for six years. In some cases, however, records will need to be kept for a longer time. For example, records need to be kept in connection with the recovery of VAT input tax on expenses of longer term projects where the income from the project is to be earned much later. One reason for this is that a project intended to result in a zero rated supply can change in nature and the business can find that it is making exempt supplies.
In this case VAT input tax from years before that was already claimed on the VAT returns may become irrecoverable. For example, a construction company may be involved in constructing residential homes but when they are completed they prove difficult to sell owing to a change in the economic circumstances in the country.
The business may therefore need to lease out the residential property on short leases, giving rise to VAT exempt supplies and irrecoverable input tax. The business will therefore need to review the recovery of input tax from previous years, back to the time when the project began, and change the treatment to allow for the fact that the supply is exempt. The business will therefore need to have retained sufficient records to identify the relevant VAT input tax.
VAT records and fraud
Detailed records may be needed to prove that a trader has collected sufficient information about suppliers and customers, and is not involved in fraud. One type of fraud known as “Missing Trader Intra-Community” (MTIC) fraud takes advantage of the European Union VAT system. The traders involved in this fraud acquire goods in an EU member state and sell them to a company in another EU member state, including VAT in the sale price. They then disappear without paying the VAT to the tax authorities.
To combat this type of fraud, HMRC has the power to collect outstanding VAT from traders in the supply chain even if they had nothing to do with the fraud. This means that traders operating in certain sectors need to obtain and keep information about their suppliers and customers, to evidence that they were properly checked at the time the transactions took place. This applies especially to traders dealing in computer equipment and mobile phones, these being the type of small high value items that tend to be used in fraudulent transactions for VAT purposes.
Traders should therefore keep files on suppliers and customers containing information such as:
Evidence of their ownership, history and credit record; Details of transactions including correspondence and calculations showing how the price was set; The records relating to the receipt of consignments, including international mobile equipment identity (IMEI) numbers; The check on VAT registration numbers given.
The business will operate a reverse charge in respect of mobile phones and computer chips and will need to submit regular Reverse Charge Sales Lists (RCSLs).
Sources:
HM Revenue and Customs www.hmrc.gov.uk
“Value Added Tax” by Andrew Needham and Steve Allan, Bloomsbury Professional, 2009