The VAT Control account in the General Ledger records the amount of money owed to or owed from HM Revenue & Customs (“HMRC”) for VAT. It is where the totals of the VAT columns in the day books and cash books are posted to; amounts of VAT charged on sales are recorded on the credit side of the VAT Control account and amounts charged on purchases/costs are recorded on the debit side. A summary is shown below.
| Book of prime entry | Total of the VAT column is posted to the… |
| Sales day book | Credit side of the VAT Control account |
| Purchases day book | Debit side of the VAT Control account |
| Sales returns day book | Debit side of the VAT Control account |
| Purchases returns day book | Credit side of the VAT Control account |
| Discounts allowed day book | Debit side of the VAT Control account |
| Discounts received day book | Credit side of the VAT Control account |
| Cash Book Receipts | Credit side of the VAT Control account |
| Cash Book Payments | Debit side of the VAT Control account |
| Petty Cash Book | Debit side of the VAT Control account |
An example of a VAT Control account is shown below:
Reconciling the VAT Control account
It is important that a business’ accountant or bookkeeper reconciles the balance in the VAT Control account with the amounts declared on the business’ VAT Returns which are most commonly prepared every quarter (i.e. every three months).
If there are differences that cannot be explained the business will run the risk that the wrong amount of VAT might be paid or reclaimed and penalties can be incurred if its VAT returns are incorrect.
The reconciliation process
At the end of a VAT period (which is usually every three months) the bookkeeper or accountant will prepare the VAT return. Before this is submitted to HMRC, they will also calculate the balance on the VAT Control account to the same date.
For the majority of VAT registered businesses, there should be no difference between the amount of VAT payable to (or refundable from) HMRC and the balance on the VAT Control account. If there is a difference, the business’ bookkeeper or accountant would investigate and identify the reasons and make corrections to the VAT return or the ledgers as required.
[For some businesses there can be valid reasons as to why there would be a difference between the VAT Control balance and the amount of VAT declared on the business VAT return at the same date. For example, under certain circumstances the dates on the sales and purchase invoices may be different to the dates the transactions are deemed to occur for VAT reasons. As this is not a VAT course we will not look at this matter any further. Note however, that where these circumstances exist, a reconciliation would still be completed – it would just be a more complex process.]
Illustration
A business has gathered the following information about VAT for the quarter ended 30th June.
| Balance at 1st April | £6,401 |
| VAT on sales | £24,105 |
| VAT on purchases | £9,377 |
| VAT on purchases returns | £250 |
| Bank payment to HMRC | £6,401 |
| VAT on cash sales | £5,668 |
| VAT on petty cash purchases | £42 |
We will draw up a VAT Control account, close the account down and compare the balance in the account against the amount on the business’ VAT return for the quarter ended 30th June which records an amount outstanding for the period of £20,646.
We would then compare the above balance of £20,604 with the amount outstanding per the VAT return of £20,646. As there is a difference of £42 between these two amounts we would investigate and find out what has caused the difference.
As the difference is the same amount as the VAT in the petty cash book we would probably start by checking whether the VAT return calculations take this into account.
