I've just submitted a few VAT returns, as I imagine many of us are doing around about now.

The figures for one, however, came from a cloud accounts package (who I am deliberately not going to name) - and I had to manually adjust them.

The problem: The software didn't previously distinguish between out of scope and exempt items - so the two were lumped together under the banner 'exempt', and not included in the VAT returns.

Strictly speaking, exempt items should still be included in the net figures on the VAT return (e.g. postage costs should be marked exempt, and included in the net inputs), whereas out of scope items shouldn't be included at all - but it's not uncommon for people to lump the two together and exclude them all from the return, as that software did previously. I've tended to do the same because, in my experience, the amount of exempt items for my clients is so small that it wouldn't make much difference - much as killing half a dozen ants isn't going to get rid of the ants nest. For other people, this might vary.

However, a couple of months ago the cloud software provider made a change: It created a new tax band called out of scope, and all truly out of scope items should be marked as such. Exempt items would henceforth be included in the net figures

On the face of it, that sounds quite sensible - and it complies more strictly with how things should be done. Which is fair enough.

Until you consider what happens when you run the first VAT return after this change - what I spotted this morning when I ran the VAT return.

Previously, exempt items weren't included - so weren't flagged as having been included on a return.

So when I ran the VAT return this morning, all exempt items from previous periods, all the way back to when my client decided to start using this system, were mopped up and included in the net figures. Several years worth. Including things like opening balances on both the sales and purchase ledgers, wages payments, and payments to HMRC for PAYE and VAT.

The figures were in the region of £115K net outputs and £485K net inputs instead of £42K net outputs and £20K net inputs.

Luckily, I was able to export the return to Excel (what is it with people just assuming Excel all the time?) and load it into OpenOffice Calc, and use that to establish the total exempt amounts and produce an adjusted return for submission. Basically, I just replicated previous behaviour for this return. The alternative would be to painstakingly go through all the transactions and change them on the system.

IMO, the cloudy accounts provider did this wrong. Instead of introducing a new out of scope code, and causing the previous exempt stuff to be included on the return, they should have considered this pitfall, and relabelled the existing exempt band as out of scope (leaving it off the return) and introduced a new exempt band - which is how I would have gone about it if (say) I was making the change in desktop software under my control.

I wonder how many of their customers won't notice this problem, and will submit their next VAT returns with highly skewed net inputs and outputs.