VAT Inspection made easy thanks to Xero and Receipt Bank

No one likes a VAT Inspection.

Even if you know that every i has been dotted and every t crossed, there is still that underlying dread that your work is about to be checked by a HMRC Inspector.

Whilst a single VAT Return can trigger a VAT inspection, such as those showing an unusual rebate, most inspections are made at random and can go back up to four years. With only 7 days’ notice required, that can be a lot of paperwork to locate and organise.

Here at Fresh Financials, we are using Xero to dramatically reduce the time our clients need to spend on their VAT Inspections. In fact, we were even able to the last one remotely.


VAT Inspection made easy thanks to Xero and Receipt Bank


Could you do a VAT Return remotely?

Our last VAT Inspection was for a client who needed a large VAT rebate. As this inspection related to one VAT Return, HMRC decided to undertake their investigation over email rather than visit our client.

It was very important for our client’s cash flow that the investigation was dealt with and processed as quickly as possible.

Whilst email-based investigations are not the norm, they are becoming increasingly common. And whilst they do save you meeting with the inspector, they can go on for far longer as information is requested, sourced and returned by email and post on multiple occasions until all the criteria is met. We’ve heard of examples from fellow bookkeepers where the inspections have spanned several months, causing great amounts of stress and frustration all round.

Fortunately, every Fresh Financials’ client uses a combination of Xero and Receipt Bank, and this client was no exception.

So, using the combination of Xero and Receipt Bank, we were able to conclude the entire inspection within a week.

Here is how we were able to do it:


1.Keep your VAT information in one place

A VAT inspection will typically begin with the inspector asking you about your business.

None of their questions are designed to be tricky, but they do give the Inspector an indication of how you run your business and any areas that they may need to look at more closely.

If your Xero account has been set up correctly, within the financial settings you will be able to find your VAT number, the VAT scheme you are on and so on.

This page should provide you with all the information you need to confidently answer the VAT Inspectors initial questions. Saving you having to ask someone else, frantically flick through arch files or admit that you don’t know.

If you visit this page and find that it hasn’t been completed, that could be an indication that your Xero account hasn’t been set up in full.

As efficiency is a key driver at Fresh Financials, it’s these small steps which can help to speed up your VAT Inspection. One of the reasons is because it allows every member of the team to access your information. But it also means that information is stored consistently across our client base, so no time is wasted in retrieving these details.


2.Have all your VAT Returns to hand

Once the initial questions have been answered, the VAT Inspector will ask to see your VAT Returns.

Depending on the nature of the inspection, they may have a VAT Return in mind or they might select a particular financial year.

If you are using Xero, all you need to do is go into the Published reports and there will be a list of all your VAT Returns alongside the dates they were submitted to HMRC. From here you can simply click into the selected VAT Return and it will appear, ready to be inspected.

A quick click on the VAT Audit Report tab and there is your VAT Return in full.

Xero will show every transaction that has gone into the VAT Return, grouped by the VAT Rates applied. This will clearly show to the VAT Inspector, the dates, details, nominal code and totals of each transaction. All late claims and adjustments are also shown.

Using the export function, Xero allows you to quickly download the VAT Returns as either a CSV or a PDF, meaning we were able to send across a copy of the required VAT Return in seconds.

The interactive nature of the VAT Returns within Xero mean that you can select any transaction and be taken directly to the initial source; whether that is an invoice or a bank transaction. This is another great time saving function that we could utilise when the VAT inspector asked for more detail.

We love the transparency of the VAT Returns within Xero. The ability to jump from the VAT Return to the bank statements and onto the invoices, saves so much time, ensures nothing is missed and provides a nice clean audit trail.

Plus, keeping everything in one place means that no time is wasted, searching through files and photocopying documents.


3.Store and find backing documents at a click of a button

At Fresh Financials, we make no secret of our love for Receipt Bank.

Aside from massively decreasing the paperwork in both our and our clients’ lives, it’s during VAT Inspections that it really, truly shines.

Once the VAT Inspector has reviewed your VAT Returns and looked at some randomly selected transactions, they will move onto the backing documents.

They do this because they want to make sure that you are reclaiming VAT on the right suppliers and at the right rates and they need to see the original paperwork to do this.

The VAT inspector will choose a transaction at random and ask to see that receipt or invoice.

It’s at this point that some of you may begin to feel a bit faint. Maybe you don’t have it. Maybe it’s somewhere within 20 lever arch files. Maybe it’s attached to an email, somewhere.

For a Fresh Financials’ client, they click on the transaction within the VAT Return. That will take them to the purchase invoice and attached to that will be a PDF copy of the original receipt. It will take 2-3 clicks.

Now it is possible to tell the VAT Inspector that you will find the paperwork and forward it to them later. But this means that the time you spend on the Inspection is extended. Having everything in one place, just makes so much sense and it’s easier and far more efficient for everyone involved.


Would you like to use Xero and Receipt Bank within your business?

If you are a bookkeeper and would like to reinvent VAT Inspections for your clients or employer, we recommend that you take a look at Fresh Bookkeepers.

Fresh Bookkeepers is a monthly Xero support and training package that we have created to help fellow bookkeepers embrace Xero and create more efficient and profitable businesses.

If you are a business owner, who would like to work with a bookkeeping business who will take the strain and stress away from bookkeeping, please visit our Become A Client page for more information on how we can help.