As we emerge from a global pandemic and businesses return to their ‘new normal’ we can expect to see more tax compliance activity from HMRC, particularly in the areas of VAT and Customs Duty. This makes it a good time to ensure your house is in order by fully reviewing your procedures and controls. While a lot has already been said about Making Tax Digital (MTD), it is a relatively new compliance requirement and HMRC are likely to check whether your business is meeting all the requirements. Having MTD compliant VAT records will undoubtedly help towards preparation for the next phases, when MTD will be introduced for income tax self-assessment in April 2024 and for Corporation Tax from 2026.
Under MTD for VAT businesses are required to file VAT returns digitally. They must also have digital-links between their source/original data all the way through to the final VAT return figures submitted to HMRC. Carrying out an MTD readiness review is a good way of ensuring compliance with these requirements. Such a review focuses on how your VAT is managed, and in particular the processes and controls in place.
It is also worthwhile reviewing when VAT is charged and reclaimed. For example, has the VAT treatment of your income streams changed post Brexit or is there an opportunity not to have to account for VAT in order to improve margin.
Think about your expenditure. The VAT you incur can only be reclaimed if your purchases are made in the course of making taxable supplies. If you make exempt supplies (e.g. receipt of residential rental income), the amount of VAT you can reclaim will probably be restricted. In this scenario we would recommend taking specialist advice.
Common errors that we continue to see relate to VAT being incorrectly reclaimed on business entertainment, gifts and cars. For example, you can’t reclaim VAT relating to expenditure incurred on entertaining UK clients and customers and only 50% can normally be recovered on car leasing. As the VAT rate on hospitality varied during the pandemic, from 5% to 12.5% and now back up to 20% processes should be updated to ensure that the right amount of VAT has been reclaimed throughout the period.
Experience shows that HMRC focus on the VAT treatment of non-routine activities. These tend to be transactions which may require a different VAT treatment from day to day trading. For example, have you sold any capital assets or part exchanged vehicles or repurposed buildings? Are you confident that the VAT implications of each have been considered? Similarly, if you have sold or restructured your business or acquired another business, there are likely to be VAT issues which need to be considered.
We’d also recommend that you review any bad debts to ensure that you’ve claimed the bad debt relief you’re entitled to. On the other hand, if you haven’t paid your suppliers within six months HMRC will expect any VAT previously reclaimed to be repaid.
Brexit resulted in significant changes to the indirect tax rules for cross border trade in goods. HMRC guidance was provided late in the day with businesses only having a short time to adapt to the new rules. The priority was often ensuring that goods could move, rather than ensuring that the tax position was optimised. A review of your revised processes is recommended to check, for example, that VAT is being correctly claimed on imports and that advantage is being taken of any tax reliefs available.
For more information or to discuss any of the points highlighted in this article please contact Jacki Wells or your usual Crowe contact.
Why not visit the Crowe Customs Hub for current VAT updates and webinars.