HMRC has recently issued new, detailed Guidelines for Compliance for VAT.
‘Help with VAT compliance controls’ aims to help businesses understand HMRC’s expectations and minimise errors. The Guidelines don’t change the law: rather, they give HMRC’s view on complex, widely misunderstood or novel risks.
Though relevant to any VAT-registered business using invoice (rather than cash) accounting, HMRC says the Guidelines are unlikely to apply equally to all businesses. Businesses will need to consider what they mean for them individually, with an eye to the size, structure and complexity of their own organisation.
The Guidelines highlight some of the systems and processes that may impact overall VAT compliance, such as sales, purchases, and preparation of the VAT return. They are split
into ten sections. Each highlights potential areas of risk, sets out good practice and suggests actionable control points to reduce the risk of errors.
Aiming to improve compliance
HMRC says its aim is to help any business review its systems, and put controls in place to improve compliance. Where a business identifies risks, HMRC says it expects it ‘to work towards improving compliance and to review those systems and processes more often. This will help to reduce the risk of VAT assessments, interest and penalties’.
Common areas of error
Employee expenses: This section includes three key areas where mistakes are often made: motoring expenses, mobile phones and business entertainment. With regard to business entertainment events, it recommends that appropriate VAT rates should be available and correctly applied so that:
100% of VAT is reclaimable if event attendees
are employees
- no VAT is reclaimable if event attendees are UK non-employees (for example business contacts, clients or prospective clients)
- VAT is apportioned if event attendees are employees and non-employees.
Suggested good controls here are:
- having a process for identifying attendees (as employee or non-employee)
- VAT on non-employee entertaining is automatically blocked
- automatic input tax apportionment based on split of employees and non-employees
- training for expense system users and managers on high-risk VAT areas like business entertaining.
Making Tax Digital (MTD): Recommendations for good practice to support MTD reporting are included in the sections on VAT reporting and manual adjustments. Though the VAT account records have to be kept digitally, and any tax adjustments recorded in the functional compatible software, it’s only the total for each type of adjustment that is thus kept: not the details of the underlying calculations. HMRC stresses that calculations made outside the functional compatible software supporting VAT adjustments should still be kept separately for audit trail purposes.
End to end accuracy
Ultimately, the issue is the integrity of the figures on the VAT return. Businesses need to be confident that the VAT compliance process, from end to end, is as risk-free and accurate
as possible. In HMRC’s words, even if a business outsources its VAT compliance obligations, it can’t outsource the risk. ‘Legal responsibility and the potential for reputational damage’ remain with the business.
We should be happy to help you review VAT compliance in the light of the new Guidelines or to answer any questions you may have.
Please do get in touch to speak with one of our specialist advisers and discuss this further, please email solutions@ellacotts.co.uk or call us on 01295 250401.
* Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
Business Newsletter Feb 2025
