How do businesses keep on top of an evolving UK VAT and Customs Duty regime?

Businesses are increasingly focusing on their governance and ensuring robust processes and controls are in place; while it remains an aim, there is less emphasis on optimising “what” amount of tax is due/ recoverable and much more on “how” tax compliance is dealt with and ensuring that the right amount of tax is paid at the right time.

This approach reflects the changed climate in which businesses and tax advisers operate; tax has become an emotive and high profile subject thanks to significant reporting in the media, punitive measures being taken by HMRC to (rightly) challenge tax evasion and difficult economic times. At the same time, businesses are also having to deal with a significant amount of change in the VAT regime.

There has also been a marked increase in the use of technology to automate elements of VAT compliance. The UK’s Making Tax Digital (MTD) for VAT regime covers almost all UK VAT registered persons and the recent introduction of a specific penalty regime for MTD failings suggests that HM Revenue and Customs will soon be reviewing MTD as part of their VAT compliance audits. We also know that MTD will continue to evolve, both in being applied to other UK taxes but also, most likely, to provide HMRC with details of the transactions making up the numbers submitted on the VAT return.

This approach reflects the changed climate in which businesses and tax advisers operate; tax has become an emotive and high profile subject thanks to significant reporting in the media, punitive measures being taken by HMRC to (rightly) challenge tax evasion and difficult economic times. At the same time, businesses are also having to deal with a significant amount of change in the VAT regime, including an increase in automation and technological developments such as AI. 

There has also been a marked increase in the use of technology to automate elements of VAT compliance. The UK’s Making Tax Digital (MTD) for VAT regime covers almost all UK VAT registered persons and the introduction of a specific penalty regime for MTD failings suggests that HM Revenue and Customs will soon be reviewing MTD as part of their VAT compliance audits. Indeed, we have possibly seen the early signs of this with some of the compliance checks our clients have received recently. We also know that overtime, MTD will evolve, both in being applied to other UK taxes but also, most likely, to provide HMRC with details of the transactions making up the numbers submitted on the VAT return.

A changing tax climate

In recent years, we have had a large number of VAT decisions in the tribunal and higher courts, there have been long running changes/ disputes with HMRC in relation to areas such as holding company VAT recovery, digitisation and new technologies are leading to new business models and ways of selling goods and services to customers and there has been a lot of changes to international trade and the UK’s Customs Duty requirements; with Customs tariffs having become headline news following recent actions taken by the US government..

In an ideal world, if a business has clear and robust processes then it should be able to adapt to this changing landscape and to continue to meet its VAT compliance processes. Clearly, we operate in the real world which is not always perfect, so there are questions for businesses to consider when thinking about how they are able to deal with change.

• Is there a process in place to identify changes in the indirect tax regime that are relevant to the business? The change could come from case law, HMRC interpretation or new laws, and could be in the UK or internationally; it could be to the VAT rate due on products or a change to the amount of VAT that can be reclaimed.
• Who is responsible for the preparation of the VAT returns? Are there clearly documented processes that would allow someone else to take this over if a key staff member is unexpectedly unavailable?
• Who has review and sign-off for the VAT return to ensure that the numbers to be submitted are accurate and that any payment owing is made on time?
• What training are the staff involved with VAT given? How often is this refreshed/kept up to date?
• What links are in place with the business teams that develop new products/win new business to ensure that new sources of revenue are treated correctly for VAT purposes?
• Could data analytics be used to look for errors and test the reasonableness of the VAT return numbers that are to be submitted – for example, trend analyses and comparisons to previous VAT payments/repayments in prior periods? Analytics also allows a greater volume of data to be tested and “human” time spent on the “value add” review of any exceptions identified.
• Where AI/ automation is used, who “trains the machine” and how can its outputs be verified? Professional scepticism may be needed. 
• What process is in place to manage the VAT aspects of “exceptional items” or non-routine transactions, such as VAT incurred on costs associated with deal fees or large one-off legal costs?
• How and when are indirect taxes considered where the business is considering making amendments to either the legal and physical relationships with its suppliers/customers, i.e. making changes to its supply chains?
• Have MTD processes been reviewed? Focus should not only be on digital submission to HMRC – which was the very first MTD requirement and most likely the simplest – but also on the existence of digital links between the different software applications used in preparing the VAT return and on the compliance with digital record keeping.

Many of the above are considerations for businesses that are subject to the Senior Accounting Officer (SAO) regime which is overseen by HMRC and applies to all “large companies” (broadly, UK incorporated companies with a turnover in excess of £200 million in the preceding financial year and/or a balance sheet total of more than £2 billion). The SAO of the organisation has to certify that the company, and each of its subsidiaries, establishes and maintains “appropriate tax accounting arrangements”. In practice, this focuses on “how” the business manages its tax obligations and in particular, the process and controls in place to ensure that the right amount of tax is paid, at the right at the time.

Customs duty

While this article has largely focused on VAT, the same principles also apply to customs duty – another indirect tax. Indeed, since Brexit there has been a greater number of imports into the UK, often by businesses that previously had limited experience of customs and dealing with import processes. Customs tariffs became headline news during Spring 2025 following actions taken by the US government and the focus highlighted the significant impact that duties have on sales prices/profit margins.

As customs duties represent an irrecoverable cost, and because delays with importation at the port can have a significant impact on supply chains, we recommend that businesses review their customs compliance procedures to see whether there are efficiencies to be gained in their processes.

How we can help

We have an experienced team of VAT and Customs experts, and our global network of specialists means we are equipped to support you both in the UK and beyond.

For more information or to discuss any of the points highlighted in this article, please contact Robert Marchant or your usual Crowe contact.