VAT Control Account - VAT refund

RosieCarlisleRosieCarlisle Greater ManchesterRegistered Posts: 60

I have my second exam on Tuesday - bookkeeping 2 - and I'm feeling pretty confident, but I seem to be having a mental block with one thing. When working with VAT Control Accounts, why does a VAT refund from HMRC go on the credit side of the account?

Thanks in advance!


  • ariadneariadne Registered Posts: 218
    I haven't come cross a VAT control account in recent studies, and I've just finished studying Accounts Prep at L3, so that may be good news.

    Working backwards, when you record the payment of a VAT refund you Debit the bank which must lead to a Credit entry on the other side - into the VAT control account. Think of the VAT control account in the same way as a purchase or sales control account. There is a VAT account al.ready but the control account is recording the money owed by you/to you.

    In my head it makes sense that the VAT control account is updated when the VAT return is due, I don't know if this is the case. But if so you would total and balance the VAT account - where purchase VAT is a D and can be reclaimed and sales VAT collected is a C and is due to be paid to HMRC. If the amount paid on purchases is greater than the amount on sales you can reclaim the difference (if the opposite is true you owe the difference to HMRC).

    So if there is a D balance you can transfer the amount from the VAT account to the VAT control account (C VAT D VAT control).

    A D balance in a VAT control acc will be a receivable - like in the sales control account (a C balance in the VAT control accout would be a payable, like in the purchase control account). When the D balance owed to you is paid off you will show this with a Credit which takes the balance owed to zero. The opposite being true for a payment if you owe to HMRC.

    I hope that makes sense, it's easier to draw out accounts to show this. Think of the VAT account as a combined purchases and sales ledger in that it can deal with both sides - payables and receivables. Also knowing that payables are liabilities so always a Credit and receivables are assets and always a Debit helps.
  • RosieCarlisleRosieCarlisle Greater ManchesterRegistered Posts: 60
    Thanks for this. I'm confusing myself because I'm thinking of the VAT control account as the VAT account basically - so anything on the CR side increases the liability that we owe. So the idea of us receiving a payment from HMRC and this increasing what we owe was what I was struggling with!

    So when we receive or pay VAT to HMRC, it'll only be entered in the cashbook and the VAT control account? Not in the VAT account too? Also is there always a VAT control account and a VAT account?

    Still not sure I've completely got my head around it, but as long as I think of it as a combined PLCA and SLCA then I should be okay!
  • CeeJaySixCeeJaySix Well-Known Registered Posts: 645
    Don't get obsessed with VAT accounts and VAT control accounts, what there is and isn't in reality varies from system to system (often there's an input tax, output tax and VAT control). You just need to think of it as one account that tracks how much VAT you owe.

    Every time you make a sale, you credit sales and the VAT Control a/c, and debit trade receivables (assuming credit sale).

    Every time you make a purchase, you debit purchases and VAT Control a/c, and credit trade payables.

    Thus if you make more purchases than you do sales, you have a debit balance on VAT control and HMRC owe you money - the VAT control account becomes a debtor.

    Thus when you receive the refund you dr bank cr VAT control - you are not increasing what you owe to HMRC, you are cancelling out what they owe to you.
  • klechowklechow Registered Posts: 2
    CeeJaySix said:

    Thus if you make more purchases than you do sales, you have a debit balance on VAT control and HMRC owe you money - the VAT control account becomes a debtor.

    The concept of VAT Control Account makes me uneasy. It settled in my mind that the account can be either Asset, Liability or Equity for Balance Sheet accounts or Expense / Revenue for Proffit / Loss statement accounts.

    VAT Control Acct should be understood as either Liability or Asset depending on the balance on it. If it's set as liability by default, than it could yield to negative liabilities in total.

    Would this be all right to have VAT Payable & VAT Receivable separately instead of VAT Control?
  • Clintm15Clintm15 Well-Known FarehamRegistered Posts: 233
    It's quite simple my man.

    If you have more VAT inputs than outputs you have a debit balance. This balance is an asset, a tax asset.

    We liquidate this asset by crediting the VAT account and debiting the bank.

    That's how I think about it.
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  • klechowklechow Registered Posts: 2
    Thank you, I'm still not sure if I'm getting this.

    Should I understand VAT Control Account as transitional? It resembles Income Summary account. Am I getting this correctly?

    Thank you
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