UK's VAT guidance indicates starting point for tax inspections

The UK tax authority, HM Revenue and Customs (HMRC), published a 10-section guide that details expectations for organisations to manage their VAT position. This is part of a number of similar HMRC publications rolled out over the past year, including on corporate tax, transfer pricing, and pay-as-you-earn settlements.

VAT is a transaction tax that’s due and calculated for in real-time, requiring decisions every day on what should be paid or reclaimed. Having a robust VAT compliance process is essential to avoid unexpected financial or staff-time costs. A well-run VAT compliance function can ensure organisations optimise the amount of VAT they pay from an absolute and cash flow perspective.

The guide, published on 18 September 2024, suggests best practices and hints at what the UK tax authority will look at during an inspection.

The actions HMRC have outlined may also play a significant role in its stance on whether a business has taken reasonable care to ensure accuracy throughout the VAT reporting process. This is important for determining whether penalties can be applied when a taxpayer makes errors.

Although beneficial for businesses, the guidelines likely will also play a significant role going forward as a starting point for HMRC during inspections.

Documentation

A business should have written documents that set out its processes for preparing a VAT return. This should include necessary information, checks to make on the return to verify the information, and the review process.

The guidance stresses the need for appropriate persons, VAT professionals or those with adequate training, to be involved and emphasises evidencing the VAT return review processes and identifying and resolving errors. Businesses also need to demonstrate how they reach a VAT position on more complex technical points.

Risk management

Businesses should be aware of key risks and should have a plan to manage this, for instance by collecting VAT numbers from customers to evidence B2B supplies. As a self-assessing tax, VAT places the responsibility for accuracy on the taxpayer, so implementing risk management processes will help VAT-registered businesses avoid errors.

Data analysis

As the move to digital reporting continues, the additional value and insight that data analysis provides can’t be underestimated. The guidance refers to several recommended trend-based checks that businesses should complete in the VAT return preparation cycle. Looking at the values in the VAT return boxes over the past few years will show any anomalous results, such as a sudden increase in VAT to recover, which might be the result of an error when uploading VAT invoice details.

These checks act as a form of control, allowing for potential variances to be identified at source and then checked before the return is submitted, improving compliance by catching errors early. We believe HMRC expects technology to be used not only going forward, but also for review of historic returns, to check for and explain variances that haven’t previously been documented.

Automation

Systems should be automated when possible, meaning there is just one manual upload that takes place into a system and then after that all data is transferred via API links or exported into spreadsheets. There should be no copy and paste applied. This ties into the Making Tax Digital initiative, which aims for all businesses to use IT to manage their VAT registration. HMRC expects software to be implemented effectively, by appropriate persons who have robustly tested it, and how that interacts with the VAT return to be mapped so it can be clearly understood.

Error identification and correction

Although the guidance doesn’t include any significant changes to error identification and correction processes or requirements, the inclusion of a standalone section on correcting errors in part 10 of the guidance indicates that HMRC may review and assess historic periods with greater scrutiny. It should also be interpreted as a reminder that businesses are expected to correct all errors found via the methods available to them.

The guidance also discusses the need to have sufficient records to evidence the values in the VAT return. It appears HMRC expects that it will be possible from a review of the electronic ledgers to find the corresponding invoices and bank account entries to show the complete audit trail of a transaction. This isn’t likely to be something businesses complete at the moment and highlights new processes that they should consider implementing.

Takeaways

The recent increase in staff numbers and investment for HMRC announced in the October 2024 budget likely will affect HMRC’s behaviour on how businesses are managed. We would expect that if businesses haven’t shown adequate progress toward best practice risk management and don’t have adequate documentation, any errors will now come under greater scrutiny.

Businesses should review their current VAT reporting processes now and compare them to the new guidance with a view to identifying any gaps. They also should develop an action plan to remedy any gaps they find.

Businesses should also seek buy-in from the appropriate stakeholders to help with any transition.

Where a business is within the Senior Accounting Officer (SAO) system, it has a £200 million, that responsible person or the board should be supporting this work because it underpins the good governance required from HMRC as part of the SAO obligations, using clear documentation of processes and risks with regular review.

Engaging with the wider business to make sure everyone involved understands their role, and arranging for training will be essential. And finally, consulting with experts and engaging with HMRC to understand any points that aren’t clear will help ensure those changes made are right first time.

Further information

We have recently recorded a webinar on how to effectively manage your VAT obligations. If you would like to discuss this further, please contact Rob Janering, or your usual Crowe contact.

This article was first published on Bloomberg Tax on 11 December 2024.