The importance of regular VAT reviews

Regular review of a business’s VAT position is an essential part of good tax governance.

It can enable a business to: 

• build a clearer understanding of its overall VAT profile 
• identify areas of technical risk
• assess whether existing processes are producing the correct VAT outcome in practice.

In this article, we will look at how periodic VAT reviews can help businesses identify and address VAT risks before they become significant exposures. We will explore the different types of VAT review, the potential benefits they can deliver, and some of the most common VAT issues uncovered during due diligence exercises, health checks and HMRC-style reviews. By proactively identifying and addressing these risks, businesses can strengthen governance, improve VAT recovery and minimise the risk of assessments, interest and penalties.

A well-scoped VAT review can help identify issues at an early stage, allowing corrective action to be taken and, where appropriate, timely disclosures to be made to HMRC. This can not only help reduce the risk of assessments, interest, and penalties, but also improve cash flow by identifying opportunities to enhance VAT recovery.

Regular reviews can provide management with greater confidence in its existing controls and can help ensure the business is better prepared for future growth, acquisitions, disposals and scrutiny from HMRC.

VAT reviews can take several forms depending on the business’s circumstances, risk profile and commercial objectives. These can include:

• Tax due diligence as part of an acquisition, disposal or investment process.
• Detailed VAT audits focused on specific areas of concern.
• Broader VAT health checks designed to mirror the types of questions and testing commonly undertaken during an HMRC compliance inspection.

The specific issues identified through due diligence and VAT reviews will vary from business to business. However, there are several recurring areas which commonly give rise to VAT exposures, either because the rules are technically complex or because the required evidence, calculations or governance procedures are not consistently maintained.

• VAT grouping: It is important to ensure that all members of a VAT group continue to satisfy the common control requirements. Issues can arise where share ownership, voting rights or the wider corporate structure have changed, but the VAT group position has not been reviewed or amended accordingly, potentially resulting in historic errors and invalid grouping arrangements.
• Reverse charge on overseas services: Failure to apply the reverse charge to services received from overseas suppliers remains a common issue. While the exposure may be broadly neutral for a fully taxable business, it can create a real VAT cost for partially exempt businesses.
• Partial exemption calculations: Issues can arise where:
  • income and costs have not been attributed correctly between taxable, exempt and residual categories
  • the de minimis tests are applied properly, and the annual adjustments and standard method override calculations have not been completed accurately.
• Zero-rated supplies: Businesses must ensure that sufficient commercial and transport evidence is retained to support the zero-rating of goods supplied to non-UK customers. Even where the underlying transaction is capable of being zero-rated, the absence of the correct evidence can expose the business to an output tax assessment.
• Option to tax: For businesses charging VAT on certain property-related supplies, it is important to confirm that a valid option to tax is in place, and that supporting evidence can still be located. Property transactions are frequently reviewed by HMRC and weaknesses in option to tax records can create significant exposure.
• Transfer of a going concern: Businesses must ensure that all relevant conditions are satisfied when an acquisition or disposal is treated as a TOGC. Reviews commonly focus on whether the facts support TOGC treatment, whether the buyer’s intended use of the assets is consistent with that treatment and whether VAT incurred on deal costs is recoverable by the seller or buyer.
• Capital Goods Scheme: A VAT review can identify cases where a business has failed to recognise that a qualifying property acquisition or refurbishment falls within the scheme or has not calculated and accounted for the required annual adjustment. This can be particularly relevant where the taxable use of a property has changed over time.
• Bad debt relief on sales and purchase invoices: A VAT review can also identify instances where relief has not been claimed, or has been claimed incorrectly, in respect of qualifying debts or credits that have remained unpaid for more than six months. This can represent both a technical compliance issue and a missed opportunity to recover VAT previously accounted for to HMRC. 
• VAT invoice evidence: It is important to ensure that valid VAT invoices are held which satisfy HMRC requirements and support the recovery of input tax. Even where expenditure is genuine and business-related, incomplete or invalid documentation can lead to input tax being denied during an HMRC review.
• Invoicing to other group entities: A VAT review can highlight situations where supplies between related entities are not being documented correctly due to informal contracting, invoicing, or payment arrangements. Unless the entities are members of the same VAT group, transactions between them are subject to the normal VAT rules, including the need for VAT to be accounted for when due. 

Periodic VAT reviews can help businesses identify potential areas of VAT risk and exposure at an early stage, enabling any errors or inaccuracies to be rectified promptly. 

Early identification and remediation of VAT issues can help minimise the accumulation of historical liabilities, interest and penalties, while also ensuring ongoing compliance with HMRC requirements. 

Regular reviews may also highlight opportunities to improve VAT recovery, strengthen internal controls and enhance the efficiency of VAT compliance processes.

If you would like support in reviewing your VAT position, please get in touch with your usual Crowe UK contact.