HMRC has recently released new, detailed Guidelines for Compliance for VAT, titled ‘Help with VAT compliance controls’. These guidelines aim to help businesses better understand HMRC’s expectations and reduce errors in VAT reporting. While they don’t change existing tax law, they provide HMRC’s perspective on complex, commonly misunderstood, or emerging risk areas.
These guidelines are relevant to all VAT-registered businesses using invoice accounting rather than cash accounting. However, HMRC acknowledges that they won’t apply equally to every business. Each organization needs to consider the implications based on their specific size, structure, and operational complexity.
What’s Covered?
The guidelines focus on systems and processes that affect overall VAT compliance, including sales, purchases, and VAT return preparation. Divided into ten sections, each part:
- Identifies potential risk areas
- Outlines good practice recommendations
- Suggests specific control measures to minimize error risks
Improving Compliance
HMRC’s stated objective is to help businesses review their systems and implement controls that enhance compliance. For businesses that identify risks, HMRC expects them “to work towards improving compliance and to review those systems and processes more often.” Taking these steps can help reduce the likelihood of VAT assessments, interest charges, and penalties.
Common Error Areas Highlighted
Employee Expenses
The guidelines highlight three key areas where mistakes frequently occur:
- Motoring expenses
- Mobile phones
- Business entertainment
For business entertainment events, the guidelines recommend ensuring appropriate VAT rates are available and correctly applied:
- 100% of VAT is reclaimable for events attended by employees only
- No VAT is reclaimable for UK non-employees (such as business contacts, clients, or prospective clients)
- VAT should be apportioned when both employees and non-employees attend
Recommended controls include:
- Implementing processes to identify attendees (as employees or non-employees)
- Automatically blocking VAT claims on non-employee entertainment
- Setting up automatic input tax apportionment based on the employee/non-employee split
- Providing training for expense system users and managers on high-risk VAT areas like business entertaining
Making Tax Digital (MTD)
The guidelines include recommendations for good practices supporting MTD reporting in the sections on VAT reporting and manual adjustments. While VAT account records must be kept digitally and tax adjustments recorded in compatible software, only the total for each adjustment type needs to be digitally maintained—not the underlying calculation details.
HMRC emphasizes that calculations made outside the compatible software that support VAT adjustments should still be kept separately for audit trail purposes.
End-to-End Accuracy is Critical
The ultimate goal is ensuring the integrity of figures on the VAT return. Businesses need confidence that their entire VAT compliance process is as accurate and risk-free as possible.
As HMRC notes, even when a business outsources its VAT compliance obligations, it cannot outsource the risk. “Legal responsibility and the potential for reputational damage” remain with the business.
If you need assistance reviewing your VAT compliance in light of these new guidelines or have questions, please get in touch with our VAT team. Email hello@ormerodrutter.co.uk or call 01905 777600.
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