Businesses are under increased risk of financial penalties for VAT errors driven by the complexity of the regime and HMRC’s return to a compliance focus, according to Xeinadin.

Financial penalties over VAT inaccuracies are commonplace. HMRC issued over 66,000 penalties for inaccuracies on VAT in the tax year 2021-22, a 66% increase on the previous year and a 63% increase on 2019-20. The collective value of penalties issued was over £159m – a 26% increase on the previous year and a 32% rise on 2019-20.

Following a report released in January by MPs which highlighted that £42bn of taxes had not been collected by HMRC last year – five per cent of the UK’s tax burden – HMRC has said it is hiring 2,500 more people to its compliance teams to investigate non-payment, and that it is prioritising the collection of unpaid taxes. 

Xeinadin says the risk of penalties are on the up for businesses as HMRC devotes more resources to closing the tax gap for VAT, a revenue generation priority for HMRC. Businesses are at a heightened risk of paying substantial penalties in addition to the errors made. Being able to demonstrate that they have exercised reasonable care in managing their VAT processes is a positive step that can reduce this financial exposure.

To help businesses protect themselves and manage VAT risk, Xeinadin has launched a new VAT risk evaluation tool which it believes to be the only behaviour-based VAT risk assessment tool on the market.

Increasing complexity

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HMRC’s management of VAT compliance has changed over the years. VAT is a hugely complex part of the UK tax regime, that has been made more complex by Brexit, which has changed the UK’s cross-border relationships and given the country the power to vary VAT in a way it couldn’t previously do.

Just this January, the VAT default surcharge regime was replaced by a new penalty system that imposes separate penalties for late submission of VAT returns and late payment of VAT.

In addition to this, VAT risk is often further elevated in challenging economic times by business owners often being driven into more diverse lines of business.

Businesses, and organisations in the Not-for-Profit sector, the majority of which don’t have their own tax departments to work on their returns and ensure accuracy, struggle with the complexity of VAT and therefore risk being penalised for late payments and errors.

VAT risk assessment tool

Xeinadin’s new tool, which has been successfully piloted with some of its clients, assesses companies’ attitude to VAT risk – the thought they put into it and processes they have adopted to ensure compliance in their organisation. It is designed to provide VAT registered organisations with robust supporting evidence to demonstrate to HMRC that they have exercised reasonable care.

As penalties are behaviour-based, they can be mitigated if the VAT registered entity can demonstrate that they have taken reasonable care to get the right tax declared at the right time. This includes putting processes in place for training their staff or ensuring sound checking steps exist in the production of VAT data for the Return submission.

The tool gives a risk rating for each of the company’s responses, from which a total risk score is given, together with tailored recommendations from Xeinadin’s VAT experts. A plan can be produced advising if a company needs to take actions such as recruiting expertise or adopting new systems or processes, outlining immediate and longer-term actions they need to take.

Based on an online survey, the assessment can be done remotely in a non-invasive way with no need for any physical document checking from external parties.

Xeinadin Group indirect tax director, Liz Maher, said: “VAT risk is a real and escalating threat to businesses and the Not-for-Profit sector as it becomes more complex and HMRC pushes harder to close the tax gap. Organisations fail because of VAT errors that can, often unexpectedly, arise. VAT processes and controls are not covered by the requirements of an annual audit, therefore it is often a risk area that is overlooked. This tool is designed to provide a value-added service that can significantly mitigate that risk.

“It’s an essential area of good governance. There are many organisations who don’t have expertise in this area, and this is a neat way of assessing their level of risk. We’re also considering alternative applications for it, such as the potential for using the tool as part of the due diligence process on acquisition targets. As a potentially serious area of risk, checking a company’s attitude to VAT management is an exercise very much worth doing.”