How do UK businesses keep on top of an ever-changing VAT regime?

We discuss how changes in the value-added tax regime are altering many UK businesses’ approach to dealing with compliance, and considers the change in focus in a new landscape.

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 optimizing “what” amount of value-added tax is due/recoverable, and much more on “how” VAT compliance is dealt with and ensuring that the right amount of tax is paid at the right time.

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 was introduced a few years ago and incrementally extended so that it now covers all UK VAT registered persons. Given the details released earlier this summer of the new penalty regime applicable to MTD compliance failings, it can be expected 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.

A changing tax climate

The approach to focus more on “how” than “what” 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 and punitive measures by HMRC to (rightly) challenge tax evasion.

At the same time, businesses have had to deal with a significant amount of change in a very short period – as a result of Brexit, the COVID-19 pandemic, changes to established working locations for office-based employees, and economic uncertainty. On a more granular level, there continue to be developments in VAT laws arising from Brexit and case law.

In recent years, we have had numerous VAT decisions in the tribunal and higher courts; there have been long-running changes/disputes with HMRC in areas such as holding company VAT recovery; and digitization and new technologies are leading to new business models and ways of selling goods and services to customers. Many of the UK VAT laws were written in the 1970s so do not always lend themselves to easy application to modern technologies. The recent clarification that e-books can now be taxed in the same way as their paper counterparts is just one example.

Questions for businesses to consider

In an ideal world, if a business has clear and robust processes then it should be able to adapt to this changing landscape and 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.
• 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 ($240 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 time.

Customs duty

While this article has 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.

For many businesses, the challenge immediately after Brexit was to ensure that their goods kept flowing: now, many are reviewing 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.

This article first appeared in Bloomberg Tax.