19 February 2018

VAT: The tax most likely to keep you awake at night. But should it?

Moore Stephens' latest survey on how businesses perceive VAT and the challenges it poses, has highlighted considerable disquiet about this complex tax.

VAT continues to be seen as the area of tax that poses the biggest risk to companies – even more of a risk than last year.  In this year’s survey, 40% of respondents think VAT poses the most risk to their company over the next 12 months (up from 35% last year).  Corporation tax ranked second this year, with 32% of respondents identifying it as their main tax risk.

Despite these levels of concern, only 28% of respondents said they had a written VAT policy or process document.  This is something we would encourage businesses to put right.  A VAT policy or process document does not have to be long-winded or complicated.  It should clarify common issues such as responsibilities for compiling and checking VAT returns, making VAT payments and the evaluation of VAT-related risks.  In simple terms it should confirm a business’ VAT compliance procedures.

In contrast, well over half (56%) of survey respondents said they have a plan in place for Brexit – up from 27% last year.  This is impressive given the stage of Brexit negotiations and continued uncertainty about the final agreement and the UK’s relationship with the EU.

Inspections

Despite HMRC’s preferred policy of conducting fewer visits and handling more issues remotely over half of the survey respondents said they had a VAT inspection in the last four years, a slight increase on last year.  The high number of VAT inspections reflects the complex nature of VAT.  Indeed businesses are more likely to have had a VAT inspection than to have experienced any other form of tax investigation.  Only 28% of respondents had any other form of tax investigation over the last four years.

We have been told that tax investigations can be intrusive and disruptive.  57% of businesses that have undergone some form of tax investigation feel that it demanded too much time from senior management and 86% think that HMRC is taking a tougher approach.  86% feel that their investigation was conducted in an even-handed manner, and 74% think HMRC staff were competent.  100% of respondents thought that the outcome of their investigation was fair.

Sources of assistance

Even though many businesses see VAT as a high risk area relatively few are making use of the help available to them from HMRC.  Only 16% of respondents contacted the HMRC National Advice Service in the last 12 months.  Respondents confirmed that they are taking advice from other sources such as external VAT specialists (60%), auditors (40%), and in-house VAT specialists (12%).

Businesses that used HMRC’s National Advice Service covered a variety of issues, such as the VAT treatment of new income streams, partial exemption, real estate elections, the reverse charge rules, and VAT charges to charities and government organisations.  Every respondent who had used the service said they had received a satisfactory response.

Confidence

Our survey identified a wide range of VAT issues over the last 12 months, from partial exemption to VAT recovery for groups.  45% of respondents felt highly confident (scoring 4 or 5 out of 5) that their awareness of current VAT developments was up to date. 68% felt highly confident about their general VAT compliance.

Conclusion

HMRC’s Annual Report & Accounts for 2016 confirm that VAT is the second largest revenue stream, accounting for 22% (behind 30% for income tax).  It is an important area of focus for HMRC, not least because of its many complexities.  These complexities are reflected in this year’s survey.  Businesses consider VAT to be their biggest tax risk because the potential to get things wrong is higher.

It is therefore surprising that many businesses fail to have clear and written down VAT policies and procedures.  The absence of a key member of staff at a critical time could jeopardise the accurate and timely completion of VAT returns.  Making sure that all roles, responsibilities, procedures and controls are documented and emergency plans are included could go a long way towards reducing the perceived risks that businesses have.

Our specialist VAT team regularly provide assistance to record, introduce and review VAT procedures and policies.  The team provides regular training and updates to improve and enhance the existing knowledge and awareness of VAT responsible staff.  The team provides a specialist VAT helpline and can answer any VAT related question in an understandable and practical style.  We would suggest that all businesses consider taking out a fee protection policy that could fund the cost of professional services that may be required to challenge a ruling or assessment from HMRC.  We offer a policy to our clients which runs from 1 November each year.  If you join the scheme part way through a year, the premium is adjusted accordingly.  The policy covers professional fees in relation to VAT compliance checks from the outset and disputes with HMRC following these checks, as well as enquiries under Section 60 or 61 of the VAT act, provided the policyholder is not found guilty of dishonesty, fraud or fraudulent intent.  The policy can be taken out by individuals, partnerships, companies and charitable organisations.

If you would like to discuss the findings of the survey or VAT in any more detail contact Scott Craig (VAT Partner) or Alan Glen (VAT Director).

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