Simple VAT Bookkeeping (Cash Accounting)

This approach is intended for small VAT registered businesses using the cash accounting system. It could be used by a small shop, plumber or builder. Cash accounting is when VAT is accounted for when payments are paid and received, which makes record keeping far easier. The alternative is the invoice basis, which requires records of invoices issued and received to be kept, in addition to records or payments and receipts.

What you need

You will need a computer spreadsheet (example here). If you do not have Microsoft Excel, you can download LibreOffice (a free alternative to Microsoft Office, which includes a spreadsheet) at https://www.libreoffice.org/.

What you do

A computer spreadsheet can have multiple pages (called tabs). In my example, you can see the tabs and switch between them at the bottom of the spreadsheet. Use one tab for your income and another for your expenses. Use the third tab to keep track of invoices you issue and when they are paid.

When you receive a payment, write down the date you received it, who it was from and what it was for. Record how much of the amount received is taxable at the standard rate and how much is zero-rated. The VAT amount is then 20% (or 1/6) of the total amount of your standard-rate income (which can calculate automatically).

Example income-received tab
The Income-Received Tab

Likewise, when you spend money for business purposes, write down the date you spent it, who you paid and what it was for. Designate two columns for tracking how how much the payment was and how you made the payment. If you pay for something using a business cheque put the amount of the cheque in the 'Business Bank A/C' column. If you pay by other means (cash, credit card, personal bank account), put the amount in the 'Other' column.

In the VAT column, enter how much VAT was paid (if any).

Then, you should have a number of expense analysis columns to designate what the payment was for. Within reason, the more expense analysis categories the better. Use headings appropriate to your business, with the more frequently used categories on the left. For each expense, write how much of the amount was for each category (exclusive of VAT). Sometimes the entire amount might fall neatly into one category - sometimes an amount might be split between several categories.

After you are done, the totals in each category plus the VAT should equal the total amount of the 'Business Bank A/C' and 'Other' columns. In my example spreadsheet, the last column checks if this is the case.

Remember it's a good idea to record what the payment is for in the additional information column unless it is very obvious. If you are not sure if something is a business expense or not, record it anyway. Your accountant can help you figure out these details at the end of your financial year.

Example expenses-paid tab
The Expenses-Paid Tab

The third tab helps you keep track of who you've invoiced and for how much. In this way, you can see at a glance who has paid you and who is still outstanding. When you issue an invoice, write down the date, who it was to and how much it was for. When they pay it, record the date they paid and the amount.

Example invoices_issued tab
The Invoices-Issued Tab

Additionally, a new spreadsheet should be started each VAT quarter, so that the column totals (pink figures at the top of each column) end up showing the appropriate totals for each VAT return.

As businesses vary greatly, it's a good idea to discuss the layout with your accountant before you start, and this example should only be regarded as a general guide.

Finally, keep copies of all your receipts and invoices. Keep them in separate lever-arch files and to help you find them again put a number on them (and write the same number in your spreadsheet) and store them in number order. Or if you don't have that many, keep them on a clip in date order but be sure to use a clip that won't fall open if you drop it! If for any reason you lose or forget to get a receipt, record the payment anyway. The most important thing is to record every payment you receive and every expense you pay out.

Other Records

It is a good idea to keep a separate business bank account. Make sure you always complete the cheque book stub to show what payments are for, and always use a bank paying-in book to keep a record of bankings.

It may also be advisable to keep a note of journeys driven, for at least a sample period of a month each financial year (although HMRC prefer the record to be for the full year). Record the vehicle mileage at the beginning of the period, then all business journeys during the period, and the vehicle mileage at the end of the period. This is so that the proportion of business to private motoring can be reliably established. Without a mileage log of this type, HMRC could challenge the business motoring expenses claimed. In some cases it is possible to claim all business motoring on a mileage basis (at 45p a mile). See my FAQ about motoring expenses.

At the end of your financial year, make a note of your cash-in-hand, your stock (at cost net of VAT), and details of any amounts owing to the business or by the business. Then give this information to your accountant, together with the receipts and invoices, the bank statements and cheque book stubs/paying-in books.