VAT return reconciliation is the check that asks whether the figures about to be submitted to HMRC actually agree with the bookkeeping underneath them. A return can look complete on screen while the bank is still unreconciled, purchase invoices are missing, sales have been recorded net of fees or the VAT control account contains unexplained balances.

The useful question before filing is not simply, “Does the software produce nine boxes?” It is, “Can I explain why those nine boxes contain those figures?” A dependable VAT return reconciliation connects the VAT Return to sales, purchases, bank and payment accounts, supporting documents, adjustments and the VAT control account before anybody presses submit.

What VAT return reconciliation is actually checking

A VAT Return is produced from the records and VAT treatment held in the bookkeeping system. HMRC’s guidance on what to include in a VAT Return says the return includes total sales and purchases, VAT owed, VAT reclaimable and any amount due from HMRC.

A VAT return reconciliation checks whether those totals are supported by the underlying records. It is not a separate tax calculation designed to create a preferred result. It is a control process that looks for missing transactions, duplicated entries, incorrect VAT codes, unsupported claims and balances that do not make sense.

That is why the process should happen before submission rather than after HMRC has received the return. A return that has already been filed may need a formal correction if an error is later identified.

The VAT Return is due, but are the books actually complete?

Deadline pressure can make a business focus on submission before completeness. The software shows an open VAT period, the deadline is approaching and the natural temptation is to generate the return from whatever has been entered so far.

But VAT return reconciliation starts by asking whether the period itself has been processed fully. Have all sales invoices been entered? Are supplier bills current? Have credit notes, refunds, cash purchases and costs paid personally by directors or employees been recorded? Have card processors or marketplaces been dealt with at gross rather than simply from the bank settlement?

HMRC’s VAT record-keeping guidance sets out the records VAT-registered businesses must maintain. The return should follow from those records rather than becoming a quarterly attempt to reconstruct them.

Bank reconciliation is part of VAT return reconciliation

A business can have the correct VAT codes on the transactions that are present and still have the wrong return because some transactions are missing altogether. This is where bank reconciliation becomes an important part of VAT return reconciliation.

Every relevant current account, credit card and payment platform should be brought up to date and compared with its external statement. Missing purchases, duplicated payments, unidentified receipts and transfers posted as income or expenditure can all affect the figures from which the return is produced.

Our guide to bank reconciliation explains why clearing imported bank-feed lines is not enough on its own. The accounting balance should agree with the independent financial record, and unexplained differences should remain visible until they are understood.

Reconciliation does not prove that every VAT code is correct. It does, however, provide stronger evidence that the financial activity has been captured before the VAT review begins.

VAT return reconciliation should compare sales with the return

Sales are one of the first areas worth comparing because missing or netted-down income can affect several VAT Return boxes. The sales ledger, till reports, eCommerce platform reports or other source records should make sense against the sales figures feeding the return.

A good VAT return reconciliation looks for obvious gaps and unusual movements. Has turnover increased sharply? Is a whole sales channel missing? Have card settlements been posted as the sales figure even though fees and refunds were deducted before the money reached the bank?

HMRC’s VAT Notice 700/12 explains how the nine boxes are completed. The correct VAT treatment can vary according to the nature of the supply, so an unexplained difference should be investigated rather than corrected through an arbitrary journal.

Gross sales and net bank deposits are not interchangeable

This matters especially for businesses using Stripe, PayPal, Amazon, Shopify payment providers, delivery platforms or card terminals. The amount deposited into the bank can be lower than the customer’s original payment because fees, refunds, chargebacks or other deductions have already been taken.

During VAT return reconciliation, those settlement reports should be checked where they are material. Posting only the net bank deposit can understate both sales and costs and can also distort VAT reporting where VAT is calculated from the wrong underlying amount.

The same principle applies to cash-heavy businesses. Cash takings do not become visible simply because part of the cash is later banked. Till records and cash controls may therefore form part of the evidence supporting the return.

Purchase VAT needs invoices, not just bank transactions

A payment to a supplier does not by itself prove how much VAT was charged or whether VAT is recoverable. A proper VAT return reconciliation therefore checks material purchase VAT against the supporting invoices and the nature of the expense.

This is particularly important where bank feeds have been processed quickly from the transaction description. A payment may have been coded with standard-rate VAT even though the supplier invoice shows no VAT, a different treatment or a mixed supply.

The objective is not to re-read every routine invoice from scratch each quarter. It is to have a process that identifies missing documents, unusual VAT amounts, large claims and transactions where the code does not fit the supporting evidence.

Credit notes and refunds can change the VAT picture

Sales and purchase credit notes are easy to overlook when they arrive outside the normal invoice process. A supplier may issue a credit after a return, a customer may receive a partial refund, or a platform may reverse a transaction.

As part of VAT return reconciliation, credit notes should be recorded and allocated to the correct customer or supplier where appropriate. Otherwise the sales or purchase figure may remain too high and the VAT position may no longer reflect the commercial transaction.

Refunds should also be distinguished from ordinary expenses. A customer refund is not the same thing as buying something from a supplier, even though both can appear as money leaving the bank.

The VAT control account should explain what is owed to HMRC

The VAT control account is one of the strongest places to look when completing a VAT return reconciliation. It should provide a coherent trail between VAT arising from transactions, adjustments, submitted returns and payments to or repayments from HMRC.

An unexplained VAT balance can indicate a payment posted to the wrong account, an old return that was never reflected correctly, duplicated journals or an adjustment that changed the VAT Return without the corresponding accounting entry.

The balance does not have to be zero. At a period end there may legitimately be VAT payable or receivable. What matters is that the amount can be explained and linked to the filed or pending return and subsequent HMRC payment or repayment.

Do not use a VAT adjustment simply to make the numbers agree

A manual adjustment can be legitimate, but it should have a reason and supporting calculation. It should not become a shortcut for finishing VAT return reconciliation when the real problem is incomplete bookkeeping.

For example, if a purchase invoice was entered using the wrong VAT code, correcting the underlying transaction may provide a clearer audit trail than inserting an unexplained amount into a VAT box. Other circumstances genuinely require separate adjustments, depending on the facts and VAT rules.

Our guide to VAT adjustments in Xero explains the distinction between correcting source transactions and using separate VAT adjustments in that software. The principle applies more widely: an adjustment should explain a real VAT issue, not conceal an unreconciled difference.

Compare the nine boxes, not only the amount payable

Business owners naturally focus on Box 5 because it shows the net VAT payable to HMRC or repayable to the business. But VAT return reconciliation should not stop there.

Boxes 1 and 4 show VAT due and VAT reclaimed within the return framework, while Boxes 6 and 7 contain relevant sales and purchase values excluding VAT. Other boxes may apply according to the transactions and location involved. A plausible Box 5 can therefore hide problems elsewhere in the return.

A useful review looks for figures that are unexpectedly high, low or negative compared with the business activity. The purpose is not to force each quarter to resemble the previous one. Genuine changes happen. The purpose is to understand why the return changed.

VAT return reconciliation should consider unusual transactions

Large equipment purchases, imports, exports, reverse-charge transactions, property transactions, bad debts and unusual one-off sales can affect a return differently from ordinary domestic sales and purchases.

A VAT return reconciliation should flag these items for review rather than assuming the software’s suggested code is correct. Automation can repeat an incorrect treatment just as efficiently as a correct one.

Where the VAT treatment itself is uncertain, that question moves beyond routine bookkeeping. The transaction should be identified clearly and referred to an appropriately qualified VAT or tax adviser rather than guessed to meet the filing deadline.

Making Tax Digital does not prove the VAT Return is correct

Making Tax Digital for VAT requires VAT records and submissions to be handled through compatible software, subject to the applicable exemptions. HMRC’s current Making Tax Digital for VAT guidance confirms that VAT-registered businesses should keep VAT records and submit VAT Returns using compatible software.

That digital process improves the route by which records and returns are maintained and submitted, but VAT return reconciliation is still needed. Compatible software cannot independently know that a missing invoice is sitting in somebody’s email inbox or that a marketplace settlement was recorded net of fees.

Software produces a return from the information it has. The bookkeeping process determines whether that information is complete and correctly supported.

Previous VAT periods can affect the current reconciliation

A strange current VAT balance may have started several quarters ago. A payment could have been posted incorrectly, a previous adjustment may not have hit the ledger as expected, or a filed return may not agree with the balance brought forward.

That is why VAT return reconciliation sometimes needs to compare the current VAT control account with earlier filed returns and HMRC payments. Historical differences should not simply be rolled forward indefinitely because the current quarter is under deadline pressure.

Where an error is found in a return already submitted, the correction method depends on the nature and amount of the error. HMRC’s VAT error-correction guidance explains how errors in VAT records and previously submitted returns should be dealt with.

A potentially material, deliberate or technically complex VAT error should be referred for appropriate professional advice rather than corrected casually through the current bookkeeping.

First returns need an even stronger VAT return reconciliation

The first return can contain additional complications because the VAT period may not be a normal quarter and the business may have transactions around its effective registration date. There may also be qualifying pre-registration VAT to consider depending on the circumstances.

A first-period VAT return reconciliation should therefore confirm the VAT registration date, filing period, opening balances and treatment of transactions entered while the business was being registered.

Our first VAT Return guide covers that process in more detail. Once the first return is correct, the closing VAT position should provide a clean starting point for later periods.

A practical 10-step VAT return reconciliation

  1. Confirm the VAT period. Check that the return covers the correct start and end dates and that the software is using the correct open obligation.
  2. Complete the bookkeeping. Enter known sales, purchases, credit notes, refunds and relevant adjustments for the period.
  3. Reconcile financial accounts. Bring bank accounts, cards and material payment platforms into agreement with external statements.
  4. Review sales totals. Compare VAT Return sales figures with the sales ledger, till or platform reports where appropriate.
  5. Review purchase VAT. Check material claims against supplier invoices and investigate unusual or unsupported VAT codes.
  6. Check credit notes and refunds. Make sure reductions in sales or purchases have reached the correct period and customer or supplier account.
  7. Review unusual transactions. Identify imports, exports, reverse charges, large assets and other items needing additional attention.
  8. Reconcile the VAT control account. Explain the relationship between transaction VAT, adjustments, earlier returns and HMRC payments or repayments.
  9. Review all nine boxes. Do not approve the return solely because the net Box 5 figure looks plausible.
  10. Resolve or escalate queries before filing. Correct bookkeeping errors and refer uncertain VAT treatment for appropriate advice.

A consistent VAT return reconciliation should leave a clear audit trail showing how the return was built and what evidence supports the main figures.

What should be retained with the VAT Return?

The exact working-paper pack depends on the business, but it is sensible to retain enough information to explain how the return was prepared and approved.

HMRC’s record-keeping rules determine the statutory records a VAT-registered business must retain. The additional VAT return reconciliation working papers help show how those records were reviewed before filing.

Why quarterly panic usually points to a bookkeeping problem

If every VAT deadline begins with two days of downloading statements, finding invoices and clearing hundreds of bank-feed lines, the problem is not really the VAT Return. It is the bookkeeping process during the quarter.

Regular processing makes VAT return reconciliation much smaller. Missing documents can be queried while the transaction is recent. Payment platforms can be reconciled monthly. Customer and supplier issues can be resolved before they reach the filing deadline.

Our guide to setting up a bookkeeping system explains how bank reconciliation, VAT records and regular reporting can be built into a recurring monthly routine.

When VAT return reconciliation should be handed over

A straightforward VAT-registered business with a small number of transactions may be able to maintain its own records and complete the checks consistently. The workload changes when there are several bank accounts, card processors, imports, reverse charges, multiple VAT rates or a backlog of unreconciled transactions.

The warning sign is not simply that VAT return reconciliation takes time. It is that the return repeatedly reaches the deadline with unresolved balances, missing records or VAT treatment that nobody feels confident approving.

Bookkeeping Packages Ltd provides a VAT returns service that can include transaction review, reconciliation, preparation and MTD submission within an agreed bookkeeping engagement. Specialist VAT advice or disclosures outside the agreed bookkeeping scope should remain with an appropriately qualified adviser.

A VAT Return should be the result of the bookkeeping

The strongest VAT return reconciliation is usually the one that contains few surprises because the records have been maintained properly throughout the period.

The bank accounts reconcile. Sales agree with the source records. Purchase VAT is supported. Credit notes are included. The VAT control account makes sense. Unusual transactions have been reviewed. The nine boxes can be explained rather than merely accepted because the software produced them.

Regular bookkeeping services can keep those underlying records current rather than treating every VAT deadline as a catch-up project.

If your VAT Return is due but the numbers in the software do not clearly agree with the books underneath them, you can contact Bookkeeping Packages Ltd to discuss the current records and the bookkeeping work required before filing.

About the Author

Stuart Kerr is Managing Director of Bookkeeping Packages Ltd, an outsourced bookkeeping service supporting UK small businesses and accountancy practices. With over 20 years of bookkeeping experience, Stuart specialises in helping businesses maintain reliable financial records and useful management information.

This article is provided for general information only. Stuart Kerr is a professional bookkeeper, not a regulated financial adviser. Nothing in this article constitutes tax, legal or financial advice. Advice specific to your circumstances should be obtained from an appropriately qualified professional.