HMRC have stated that their aim in their dealings with businesses is to:
“…seek to build and maintain open and transparent relationships with companies and to work collaboratively with them in real time to reduce their level of (tax) VAT compliance risk.”
When meeting with businesses they are therefore likely to want to discuss how VAT compliance risks are identified and how those risks are controlled and monitored. The aim of the game for businesses is to improve VAT processes and controls.
If your business wishes to establish and maintain a good working relationship with HMRC it will be important to be well prepared when engaging with them and to be able to demonstrate what controls and checks the business has in place around its VAT processes.
5 key areas HMRC may well want to discuss, together with some suggested useful VAT controls, are:
1 – Billing Systems: What products and services is VAT not charged on?
Useful VAT control: Undertake regular (for example, every 6 months) reviews of all VAT Zero-rated and outside the scope of VAT items on billing systems and confirm that treatment is correct.
2 – Billing Systems: Which customers are not charged VAT at all?
Useful VAT control: Complete regular reviews of all customers that are set up on the system not to be charged VAT and confirm that the relevant evidence is held to verify their VAT status, for example, holding a valid overseas VAT number or the required charity eligibility declaration is held.
3 – Accounts Payable: How is input VAT blocked on costs which businesses are required to treat as non-deductible, for example, business entertaining or certain car/motor vehicle costs?
Useful VAT control: Ensure no VAT posting to the accounts is possible for the relevant cost codes or run checks to identify whether VAT postings have been made and process corrections where necessary.
4 – Accounting: Is there any manual intervention in the accounting system to adjust VAT entries, for example, manual journals posted to the VAT accounts?
Useful VAT control: Prior to the submission of a VAT Return, ensure all manual journals affecting the VAT accounts are reviewed and confirmed to be correct.
5 – VAT Awareness: How is information on VAT changes communicated within the business?
Useful VAT control: Ensure regular meetings are held with individuals responsible for key VAT processes to ensure they are kept up to date with new developments. Any changes required together with agreed action points should be documented and monitored to ensure implementation dates are met.
Being able to explain to HMRC that these types of controls are undertaken by your business will contribute enormously to communicating the message that tax risk is taken seriously by your business and will hopefully enable the desired “open and transparent” relationship to be achieved.
If you are interested in learning more about how large businesses are demonstrating an ongoing commitment to implementing and maintaining up to date and robust tax accounting arrangements, read our White Paper “Taking The SAO Regime Seriously”.