How Poor VAT Records Can Cost You

HMRC expects to see the following key documents:

• Sales and purchase invoices
• Credit and debit notes
• Import/export documents
• VAT account summaries (showing input vs output VAT)
• Bank statements and till receipts
• Digital VAT records in compliant software

You can keep these digitally, provided the system clearly links each transaction to the VAT return figures.

At Loyals, we help businesses set up secure, cloud-based VAT systems that meet HMRC standards automatically — so you never lose track of vital records again.

1. HMRC Penalties and Fines

HMRC takes record keeping seriously. Incomplete, inaccurate, or missing VAT records can trigger penalties under the HMRC Record Keeping Regulations.

Common fines include:

• £400 per return for not submitting digitally via MTD
• Up to 100% of unpaid VAT for incorrect returns or undeclared transactions
• Daily penalties for persistent non-compliance

Even honest mistakes can attract interest charges and extra administrative costs.

2. Delayed VAT Refunds

If you regularly claim VAT refunds (common in construction or export sectors), HMRC may delay repayment until they verify your records. Missing invoices, mismatched numbers, or poor categorisation can put your refund on hold for months.

This directly impacts cash flow — especially for SMEs relying on VAT reclaim to balance quarterly liquidity.

Having structured, accessible digital records ensures faster HMRC processing and smoother returns.

3. Higher Audit Risk

Poor VAT records increase your likelihood of being audited. HMRC flags inconsistencies between reported figures, banking data, and supplier declarations.

During an audit, officers can demand records from the past six years. If you can’t produce them, they may estimate your liability — usually on the higher side.

Accurate, well-organised records, on the other hand, demonstrate transparency and reduce audit duration and stress.

4. Overpaying or Underclaiming VAT

Without clear records, it’s easy to overpay VAT on purchases or fail to reclaim legitimate input VAT. Many small businesses unknowingly lose hundreds or thousands of pounds each year because they:

• Forget to record small receipts
• Misclassify purchases as non-VATable
• Don’t reconcile digital and paper invoices

Accurate record keeping ensures every eligible expense is claimed and every transaction correctly classified — optimising your VAT position.

5. Inaccurate Financial Reporting

VAT records don’t just affect tax — they affect your financial statements. If VAT entries are missing or misposted, profit figures, cash flow, and balance sheets all become unreliable.

This undermines strategic decisions, investor confidence, and credit applications.

Proper VAT documentation ensures consistency between your VAT returns, management accounts, and corporation tax filings, giving a complete and compliant financial picture.

Since April 2022, all VAT-registered businesses must follow Making Tax Digital rules. This means:

• Keeping digital VAT records
• Submitting VAT returns through MTD-compatible software
• Avoiding manual data entry or “copy-paste” processes

Spreadsheets alone no longer qualify unless linked via API bridging software.

Failure to comply can result in MTD-specific fines.

To stay compliant, Loyals’ VAT Return Services ensure every record flows digitally from your accounting system to HMRC — securely and accurately.

For full government details, see HMRC – MTD for VAT.

Good VAT documentation isn’t just about avoiding fines — it actively improves how your business operates.

1. Better Cash Flow Management

Tracking input and output VAT precisely helps forecast liabilities and refunds, reducing cash surprises each quarter.

2. Faster Decision Making

Accurate data lets you review spending trends, supplier costs, and customer payments with confidence.

3. Easier Financing and Audits

Lenders and investors often review VAT compliance before approving funding. Well-maintained records build credibility.

4. Smooth VAT Inspections

If HMRC audits your company, strong digital records demonstrate professionalism and reduce disruption.

5. Scalable Systems

Once set up properly, your VAT process scales with business growth — whether managing multiple entities or international transactions.

1. Use Digital Accounting Software

Avoid paper-based systems or manual Excel files. Cloud accounting tools automatically capture transactions, link receipts, and calculate VAT correctly.

2. Record Transactions Immediately

Don’t wait until quarter-end. Enter invoices and expenses weekly to keep books up to date.

3. Reconcile Monthly

Check that bank statements match VAT transactions and invoices. Regular reconciliation prevents cumulative errors.

4. Store Receipts Digitally

Use tools like Dext or Hubdoc to scan and archive receipts. HMRC accepts digital copies if they’re legible.

5. Review VAT Codes Regularly

Ensure all items have the correct VAT rate — standard, reduced, zero, or exempt.

6. Seek Professional Review

Even with automation, a quarterly review from professionals (like Loyals) catches discrepancies before submission.

Even diligent businesses fall into these traps:

• Mixing personal and business transactions
• Failing to separate exempt and taxable sales
• Ignoring petty cash receipts
• Using outdated VAT codes
• Not keeping export evidence
• Deleting digital files too early

Each of these errors can distort returns or trigger HMRC questions. The key is consistency — document everything and retain it systematically.

Professional accountants don’t just file returns; they ensure the system behind them works seamlessly.

At Loyals, our VAT specialists:

• Set up MTD-compliant accounting platforms
• Conduct quarterly VAT checks
• Prepare reconciliation reports before submission
• Manage VAT correspondence with HMRC
• Advise on partial exemption and cross-border VAT rules

This proactive approach prevents errors before they happen, not after.

Learn more at Loyals’ VAT Compliance Services.