VAT and Customs Duty: how compliant are you?

With an increase in HMRC compliance activity expected and tax laws becoming increasingly complex, we ask whether it’s time to review, refresh and reinforce your VAT and Customs Duty processes and controls.

As a new financial year beckons, 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 is almost certainly a good time to make sure your ‘house is in order’ by critically reviewing your procedures and controls.

VAT points to consider

Firstly, are you Making Tax Digital (MTD) compliant? If so, that’s a big tick – MTD is anticipated for Income Tax/Self-Assessment next year and for Corporation Tax some time after 2026. Having MTD Compliant VAT records will undoubtedly help towards the next phases.

Under MTD for VAT, businesses are required to file VAT returns digitally but must also have ‘digital links’ between their source/original data all the way through to their final VAT return figures submitted to HMRC. In our experience, carrying out an MTD readiness review is a good way of ensuring that your business is compliant with these requirements. Such a review focuses on ‘how’ your VAT is managed, and in particular the processes and controls in place.

For some organisations, consideration may also be needed as to ‘what’ VAT is paid/reclaimed. Businesses should review the VAT treatment of their different income streams by asking the following questions: What are they? Am I accounting for VAT on them? If not, do I understand why? Is there an opportunity not to have to account for VAT to improve margin? While there are many reasons why VAT is not chargeable, as VAT is a self-assessed tax, the onus is on you to prove the liability you have chosen – a confident and knowledgeable answer will go a long way if you are asked.

Think about your expenditure, the VAT you claim back can only be claimed if you incur it ‘in the course of making taxable supplies’. If you make exempt supplies the amount of VAT you can reclaim will probably be restricted. If you are making exempt supplies professional advice is strongly recommended – the implications can be far-reaching.

There are strict VAT rules regarding business entertainment, gifts and cars – business lunches may look appealing but please remember that you can’t reclaim VAT relating to expenditure incurred on entertaining most non-employees. Don’t forget that hospitality currently has a VAT rate of 12.5% up to the end of March 2022, so processes should be updated to ensure that the right amount of VAT is reclaimed on costs such as staff subsistence.

Non-routine activities

In our experience when looking at non-routine activities, the correct VAT treatment of large one-off transactions can often be overlooked. Again, ask yourself the following questions: Have you sold any capital assets, part-exchanged vehicles or repurposed buildings? Are you confident that the VAT implications of each have been considered? Do you barter/offset sales invoices against supplies? Have you been paid not to do something (restraint of trade)? Similarly, have you restructured your business, sold or acquired any part of it? All of these transactions can be ‘in the scope of’ VAT and so care is needed to ensure that the correct amount of VAT is accounted for. Have you suffered from bad debts? You may be able to claim relief from the VAT you have paid to HMRC. Conversely, have you paid your suppliers within six months? If not, you might have to repay the VAT you claimed.

Cross-border trading

Do you export/import goods? Brexit resulted in significant changes to the indirect tax rules for cross border trade in goods. Businesses had only a short time to adapt to the new rules and 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 they are fit for purpose and that errors, which could become costly overtime, are not being compounded or to take advantage of tax reliefs that you may not know could be applied.

HMRC use Management Support Systems (MSS) data to select their customs audit target companies. MSS reports contain all the data declared at import, by or on behalf of a company, using its VAT registration number. This gives HMRC a complete picture of every declaration made, and is a useful tool for spotting anomalies in an importing pattern that may require further investigation. UK businesses are able to purchase MSS reports from HMRC, giving them access to exactly the same information as a customs auditor.

This data can often run to the thousands of lines for a regular importer and includes 26 fields of data for each line, complete with specific customs jargon and coding. Making sense of this data can therefore be a time-consuming and complex task. Customs data analytics can thus be a very useful tool in automating the scrutiny of this data, in order to give full visibility to the duty exposure and compliance profile of a business.

We have developed a tool, ‘Customs-ID’, which uses sophisticated software with the most up-to-date trade environment information to help businesses take control of their trade activity. This tool also identifies any risks and opportunities which our Customs team can translate to clear recommended actions. In short, reviewing your Customs import data can help you 'to know what you don’t know' about your imports.

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 Helen Wickenden.