SearchHMRC VAT compliance checks increasing for mid-sized businesses
Following on from the issue of HMRC’s guidelines of what it considers as goods practice in relation to VAT accounting processes in late 2024 (‘GfC8’), HMRC is now stepping up its VAT compliance activity.
HMRC is currently writing to businesses it deems mid-sized (normally £10m-£200m turnover or 20+ employees) which haven’t had a VAT compliance check in the past five years to inform them that there is a 50% chance that a compliance check may take place for them in the current 26/27 financial year.
In our experience the purpose and importance of these ‘nudge’ letters can be interpreted differently by HMRC and the businesses receiving them. While some business will use the letters as a prompt to review systems and processes, or review certain areas of risk, the letters are more commonly filed amongst an ever-growing ‘to do’ list.
On the other hand, HMRC, which considers the behaviours of a business and how it applies best practice, can view these letters as more of an instruction. On receipt, the business should be reviewing its VAT processes and high-risk areas, and if HMRC do conduct a compliance check and find errors in these areas, it will likely take the view that the business has not taken appropriate steps and may be subject to higher penalties.
Consequently, a wait and see approach is ill-advised. Where we support our clients is to help them understand what the high-risk areas are for their them. Every business is different and will have a different VAT and risk profile. The same issue could pose no VAT material risk for one business and a significant VAT risk for another. Receiving services from overseas is a key example where there is very little VAT risk for a fully taxable business but a very high risk for a business with exempt activities.
By helping clients understand it’s key VAT risks, they spend the right amount of time on the right areas in their VAT return processes. In turn, they are demonstrating to HMRC that they understand their VAT profile and can implement best practice VAT practices for their business, as expected in GfC8.
The feedback we receive when we support clients with this is that they:
- are more confident in their VAT accounting by understanding the key risk areas for their business;
- reduce the number of errors on VAT returns by having the right checks in place prior to submission; and
- can save time in their VAT return preparation with fewer, but specific and targeted, checks.
Whether you have received a nudge letter from HMRC, or just want to ensure you are meeting HMRC’s expectations in GfC8, contact our indirect tax team today to discuss how we can help your business optimise its VAT compliance processes and reduce its VAT risk.
Contact us
If you are looking for support with a VAT compliance check, or want to make sure your VAT affairs are in order, please contact us imagine@hurst.co.uk or call 0161 477 2474.