The VAT balance on your balance sheet is a debt to HMRC, or occasionally a repayment due from it. Unlike most balances, you can work out what it should be from documents outside your own books: the VAT returns you have submitted and the payments shown in your HMRC online account. A VAT control account reconciliation compares the two and explains every difference. Done monthly, it catches errors while they can still be corrected on the next return.
How the VAT accounts are laid out in the nominal ledger differs between software packages; VAT control accounts in the chart of accounts covers that structure. This guide is about proving the balance.
What the balance should be
At any month end, the total VAT balance (all VAT control accounts together) should equal:
net VAT on submitted returns not yet paid + net VAT on transactions in the open period − any repayment claimed but not yet received
That gives three typical positions:
| Point in the cycle | Expected balance |
|---|---|
| Return submitted, payment not yet due | Box 5 of that return, plus the open period so far |
| Return paid | The open period only |
| Repayment return submitted, refund not yet received | The open period, less the repayment due from HMRC |
If the business is on the annual accounting scheme or makes payments on account, add or deduct the interim payments made so far.
The routine, step by step
- Close the period in your software. Lock the dates of every submitted VAT return so nobody can add or edit transactions dated in a filed quarter.
- Print the VAT control account transactions from the start of the last submitted period to the month end, and the closing balance.
- Tie the submitted return. Take box 5 from the copy of the return you submitted, not from a report rerun today. A rerun report that no longer matches the filed figure is itself a finding.
- Tie the payment. Find the payment to HMRC, or the repayment received, on the bank statement and in your HMRC online VAT account. Check that it was posted to the VAT control account, not to an expense or to suspense.
- Tie the open period. Run the VAT report for the open period to date. Its net figure should equal the movement in the control account since the last return, excluding the return payment.
- List any difference with its cause, amount and the fix, and keep the reconciliation with your balance sheet reconciliations.
Worked example
A business on calendar quarters submitted its January to March return showing £8,420 in box 5, payable by 7 May. At 30 April, before the payment:
| Item | Amount |
|---|---|
| Box 5, January to March return (unpaid) | £8,420 credit |
| April output VAT on sales | £3,100 credit |
| April input VAT on purchases | £1,250 debit |
| Expected VAT balance | £10,270 credit |
| Actual VAT control balance in the ledger | £10,020 credit |
| Difference | £250 |
Tracing the £250: a February purchase invoice with £250 of input VAT was entered on 20 April but dated in February. It reduced the ledger balance but was not on the submitted return, and because the February period was not locked, the January to March report now shows a different figure from the one filed. The fix is to give that invoice a VAT date in the open period (most packages allow a VAT date separate from the invoice date), so the £250 is claimed on the April to June return as a late claim of input VAT, and then lock the filed period.
Why differences appear
- Late-posted documents dated in a filed period, as in the example. Locking periods prevents most of these.
- Manual journals straight to a VAT account. A journal that debits or credits VAT without a VAT code moves the ledger balance but never reaches the VAT return report. Treat any manual VAT journal as a red flag; see manual journal approval.
- Reverse charge entries with one side missing. For services bought from abroad or construction services under the domestic reverse charge, output and input VAT should both be posted and normally cancel out. A difference equal to a reverse charge amount means only one side was recorded.
- Postponed import VAT posted on a different date from the monthly statement it belongs to; reconcile it separately with the postponed VAT statement reconciliation.
- Penalties and interest from HMRC posted to the VAT control account. They are not VAT and belong in an expense account.
- Payments split wrongly, for example a combined direct debit posted partly to VAT and partly to an unrelated account.
- Edited or deleted transactions in a filed period after submission.
Errors in the books versus errors in the return
Sort each difference into one of two kinds before correcting anything.
The return was right and the ledger is wrong (an HMRC penalty posted to VAT, a payment posted to the wrong account). Correct the ledger with a journal. Nothing goes to HMRC.
The ledger was right and the submitted return was wrong (a sales invoice left out, VAT reclaimed on a non-business cost). That is an error on the return. Depending on its size it can be corrected on your next return or must be disclosed to HMRC separately; VAT corrections after filing sets out the thresholds and the method.
The reconciliation is far quicker before the next return is prepared than after. Doing it before you review the draft return, together with the pre-submission VAT return review, means each return starts from a balance you have already proved.