Tag Archives: vat-compliance

HMRC actions to counter tax avoidance

By   1 April 2025
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In the Spring Statement 2025 HMG announced a package of measures that will affect VAT and other taxes. The aim is to close the tax gap and raise over £1 billion in additional gross tax revenue per year by 2029‑30.

Anti-fraud

HMRC is expanding its counter-fraud capability to increase the number of annual charging decisions for the most harmful fraud by 20%. Additional criminal investigations is intended to deliver a strong deterrent. This will include tackling those who undermine legitimate trade and small business, fraud committed by the wealthy, fraud facilitated by those in large corporations, and by individuals and companies who make it possible for others to hide money offshore.

Snitching

There will be a new HMRC reward scheme for informants will be launched later this year. This will target serious non-compliance in large corporates, wealthy individuals, offshore and avoidance schemes. The new scheme will reward informants with compensation linked to a percentage of any tax taken as a result of their actions.

“Phoenixism”

HMRC, Companies House, and the Insolvency Service will deliver a joint plan to tackle those who use contrived insolvencies to evade tax and write off debts owed to others. This will include increasing the use of upfront payment demands, making more directors personally liable for company taxes, and increasing the number of enforcement sanctions.

Compliance

HMG will invest £87 million over the next five years in HMRC’s existing partnerships with private sector debt collection agencies to collect more unpaid tax debts. It will also invest £114 million over the next five years to recruit an additional 600 HMRC debt management staff. In addition, the Government will invest £100 million over the next five years to recruit an additional 500 HMRC compliance staff.

The government also published four consultations on:

  • How HMRC can make better use of third‑party data to increase automation and close the tax gap.
  • Proposals to strengthen HMRC’s ability to take action against those tax advisers who facilitate non‑compliance from their clients.
  • A comprehensive package of measures to close in on promoters of marketed tax avoidance, whose contrived schemes leave their clients with unexpected tax bills.
  • Options to simplify and strengthen HMRC’s inaccuracy and failure to notify penalties.

VAT Returns: A box-by-box guide

By   10 March 2025
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VAT Basics

Return boxes explained – what goes where? A general overview.

 

Box 1 VAT due in the period on sales and other outputs

The amount of VAT due on all goods and services supplied in the period covered by the return. This is output tax. The value of output tax may be affected by VAT:

  • on credit notes issued
  • when refunds are made
  • on goods taken in part-exchange
  • underdeclared or overdeclared on previous returns within certain de minimis

VAT may also be due on supplies outside the mainstream of a business, eg:

  • fuel used for private motoring where VAT is accounted for using a scale charge
  • the sale of stocks and assets
  • goods taken out of the business for private use
  • VAT due under a reverse charge
  • supplies to staff
  • gifts of goods that cost more than £50
  • certain distance sales to Northern
  • commission received for selling something on behalf of a third-party
  • VAT shown on self-billed invoices issued by your customer
  • VAT due on imports accounted for through postponed VAT accounting

Box 2 VAT due in the period on acquisitions of goods made in Northern Ireland from the EU 

Since 1 January 2021, a business is only allowed to make acquisitions on goods brought into Northern Ireland from the EU. For acquisitions, the VAT due on all goods and related costs bought from VAT-registered suppliers in the EU should be included.

Box 3 total VAT due

Show the total VAT due, the total of boxes 1 and 2. This is the total output VAT for the period.

Box 4 VAT reclaimed in the period on purchases and other inputs

Show the total amount of deductible VAT charged on business purchases. This is input tax for the period.

This will include:

  • VAT paid on imports
  • imports accounted for through postponed VAT accounting.
  • claims for bad debt relief (BDR)
  • payments on removals from a warehousing regime or a free zone
  • VAT shown on self-billed invoices issued by you
  • acquisitions of goods into Northern Ireland from the EU

Certain VAT paid by a business should not be included in box 4, some examples here.

Adjustments to the amount claimed may be required for

  • VAT on any credit notes received
  • certain VAT underdeclared or overdeclared on earlier returns
  • partial exemption

Box 5 net VAT to pay or reclaim

Deduct the smaller from the larger of values in boxes 3 and 4 and enter the difference in box 5.

If the figure in box 3 is more than the figure in box 4, the difference is the amount payable to HMRC. If the figure in box 3 is less than the figure in box 4, HMRC will repay this.

Box 6 total value of sales and all other outputs excluding any VAT

Show the total VAT exclusive value of all business sales and other specific outputs. These will include:

  • zero-rated, reduced rate and exempt supplies
  • fuel scale charges
  • exports
  • distance sales to Northern Ireland which are above the distance selling threshold or, if below the threshold the overseas supplier opts to register for VAT in the UK
  • reverse charge transactions
  • supplies which are outside the scope of UK VAT (this is debateable, but HMRC require this information)
  • deposits that an invoice has been issued for
  • net value of the road fuel scale charge

Box 7 total value of purchases and all other inputs excluding any VAT

Show the total net value of expenditure. This will include:

  • imports
  • acquisitions of goods brought into Northern Ireland from the EU
  • reverse charge transactions
  • capital assets

Boxes 8 and 9 only need to be completed goods cross the Northern Ireland border.

Box 8 value of supplies of goods to the EU

For supplies of goods and related costs, excluding any VAT, from Northern Ireland the EU made from 1 January 2021.

Box 9 value of acquisitions of goods from the EU

For acquisitions of goods and related costs, excluding any VAT, from the EU into Northern Ireland from 1 January 2021.

 

NB: If a business uses one of the following schemes there may be different rules for completing some of the boxes on returns.

  • flat rate scheme
  • cash accounting
  • annual accounting
  • margin schemes for second hand goods, works of art, antiques and collectors’ items
  • payments on account.

VAT: New HMRC Tax Agents Handbook

By   11 November 2024
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On 1 November 2024 HMRC published a new handbook for agents acting on behalf of their clients in tax matters.

The handbook contains information to help tax agents and advisers; find guidance, use HMRC’s services and contact HMRC.

 

HMRC is trialling this manual as an alternative to the collection of linked guidance on the tax agents and advisers: detailed information page. It covers:

Tax agents have the right to represent their clients in appeals and penalty proceedings, ensuring that their clients’ interests are effectively advocated.

 

New VAT guidelines for compliance

By   23 September 2024
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A newly published (18 September 2024) set of guidelines: Guidelines for Compliance GfC8 are aimed at helping businesses with VAT compliance controls and set out what HMRC considers good practice for accounting and compliance processes.

HMRC says that these Guidelines for Compliance (GfC) set out its recommended approach and are designed to help businesses understand HMRC expectations as they plan, carry out, and review the accounting and compliance processes that ensure VAT is accurately declared by a business.

The guide covers:

Purpose, scope and audience

General approach to VAT compliance controls

Order to cash

Procure to pay

Employee expenses

Record to report

VAT reporting

VAT reporting – manual adjustments

Outsourcing

Next steps — correcting errors and guidance

The guidelines are aimed at those responsible for the governance, controls, processing and submitting of the VAT return. Such roles may include:

  • VAT and tax managers
  • finance and IT professionals involved in VAT and tax
  • senior management with VAT and tax oversight, such as the designated senior accounting officer
  • VAT specialists who process and submit returns, whether in-house or within third party providers including shared service centres
  • agents

VAT: Forthcoming changes to HMRC services: GOV.UK One Login

By   5 March 2024
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HMRC has published guidance on changes to logging into its services. GOV.UK One Login is a new way of signing in to government services. It is said to provide a simple way for you to sign in and prove the user’s identity using an email address and password.

Over time it will replace all other sign in routes including Government Gateway that many businesses currently use.

A user will automatically be asked to create a GOV.UK One Login. It will not happen for everyone at the same time, and you do not need to do anything unless HMRC ask you to.

When you are asked to create a GOV.UK One Login you may need to go through a new authorisation and identity verification process, so will need to have some identification documents ready such as a passport or driving licence.

If you are a tax agent, or an organisation with a business tax account, you will continue to use Government Gateway until you’re asked to create a GOV.UK One Login.

At the moment, you can only use GOV.UK One Login to access some government services, which currently does not include VAT. In the future, you will be able to use it to access all services on GOV.UK.

VAT: The Partial Exemption Annual Adjustment

By   4 December 2023
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What is the annual adjustment? Why is it required?

An annual adjustment is a method used by a business to determine how much input tax it may reclaim.

Even though a partly exempt business must undertake a partial exemption calculation each quarter or month, once a year it will have to make an annual adjustment as well.

An annual adjustment is needed because each tax period can be affected by factors such as seasonal variations either in the value supplies made or in the amount of input tax incurred.

The adjustment has two purposes:

  • to reconsider the use of goods and services over the longer period; and
  • to re-evaluate exempt input tax under the de minimis rules.

An explanation of the Value Added Tax Partial Exemption rules is available here

Throughout the year

When a business makes exempt supplies it will be carrying out a partial exemption calculation at the end of each VAT period. Some periods it may be within the de minimis limits and, therefore, able to claim back all of its VAT and in others there may be some restriction in the amount of VAT that can be reclaimed. Once a year the business will also have to recalculate the figures to see if it has claimed back too much or too little VAT overall. This is known as the partial exemption annual adjustment. Legally, the quarterly/monthly partial exemption calculations are only provisional, and do not crystallise the final VAT liability. That is done via the annual adjustment.

The first stage in the process of recovering input tax is to directly attribute the costs associated with making taxable and exempt supplies as far as possible. The VAT associated with making taxable supplies can be recovered in the normal way while there is no automatic right of deduction for any VAT attributable to making exempt supplies.

The balance of the input tax cannot normally be directly attributed, and so will be the subject of the partial exemption calculation. This will include general overheads such as heating, lighting and telephone and also items such as building maintenance and refurbishments.

The calculation

Using the partial exemption standard method the calculation is based on the formula:

Total taxable supplies (excluding VAT) / Total taxable (excluding VAT) and exempt supplies x 100 = %

This gives the percentage of non-attributable input VAT that can be recovered. The figure calculated is always rounded up to the nearest whole percentage, so, for example, 49.1 becomes 50%. This percentage is then applied to the non-attributable input VAT to give the actual amount that can be recovered.

Once a year

Depending on a businesses’ VAT return quarters, its partial exemption year ends in either March, April, or May. The business has to recalculate the figures during the VAT period following the end of its partial exemption year and any adjustment goes on the return for that period. So, the adjustment will appear on the returns ending in either June, July, or August. If a business is newly registered for VAT its partial exemption “year” runs from when it is first registered to either March, April or May depending on its quarter ends.

Special methods

The majority of businesses use what is known as “the standard method”. However, use of the standard method is not mandatory and a business can use a “special method” that suits a business’ activities better. Any special method has to be “fair and reasonable” and it has to be agreed with HMRC in advance. When using a special method no rounding of the percentage is permitted and it has to be applied to two decimal places.

Commonly used special methods include those based on staff numbers, floor space, purchases or transaction counts, or a combination of these or other methods.

However, even if a business uses a special method it will still have to undertake an annual adjustment calculation once a year using its agreed special method.

De minimis limits

If a business incurs exempt input tax within certain limits it can be treated as fully taxable and all of its VAT can be recovered. If it exceeds these limits none of its exempt input tax can be recovered. The limits are:

  • £625 per month on average (£1,875 per quarter or £7,500 per annum) and;
  • 50% of the total input VAT (the VAT on purchases relating to taxable supplies should always be  greater than the VAT on exempt supplies to pass this test)

The partial exemption annual adjustments are not errors and so do not have to be disclosed under the voluntary disclosure procedure. They are just another entry for the VAT return to be made in the appropriate VAT period.

Conclusion

If a business fails to carry out its partial exemption annual adjustment it may be losing out on some input VAT that it could have claimed. Conversely, it may also show that it has over-claimed input tax. When an HMRC inspector comes to visit he will check that a business has completed the annual adjustment. If it hasn’t, and this has resulted in an over-claim of input VAT, (s)he will assess for the error, charge interest, and if appropriate, raise a penalty. It is fair to say that partly exempt businesses tend to receive more inspections than fully taxable businesses.

VAT: Making Tax Digital (MTD) Reminder

By   23 August 2022
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HMRC has issued a reminder that:

  • from 1 November 2022, taxpayers will no longer be able to use their existing VAT online account to file their monthly or quarterly VAT returns
  • taxpayers that file annual VAT returns will still be able to use their VAT online account until 15 May 2023
  • by law, VAT-registered businesses must now sign up to MTD and use MTD-compatible software to keep their VAT records and file their VAT returns
  • there are penalties for businesses that do not sign up for MTD and file their VAT returns through MTD-compatible software,
  • even if taxpayers already use MTD-compatible software to keep records and file their VAT returns online, they must sign up to MTD before they file their next return
  • businesses may be able to get a discount on software through the UK Government’s Help to Grow: Digital scheme, which offers 50% off compatible digital accounting software

VAT: How to avoid MTD penalties

By   15 June 2022
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HMRC has published a new Factsheet CC/FS69 which sets out compliance checks to be made to avoid penalties for Making Tax Digital (MTD).

Under MTD, VAT-registered businesses must keep certain records digitally and file their VAT returns using compatible software.

The Factsheet covers:

  • signing up to MTD – go to www.gov.uk and search for ‘VAT record keeping’. A business must have functional compatible software in place before you signing up
  • filing VAT return using functional compatible software. This needs to be able to record and store digital records, provide HMRC with information and VAT returns from the data held in those digital records, and receive information from HMRC
  • keep records digitally in an “electronic account” (all transactions must be contained in an electronic account but there is no need to scan paper records like invoices and receipts)
  • use digital links to transfer or exchange data
  • use the checking functions within the software (to ensure returns are correct before being filed)

Penalties

HMRC levy penalties for MTD for the following actions:

  • filing returns not using use functional compatible software. A penalty applies for every return filed in error
  • not keeping records digitally, a penalty applies for every day on which a business does not meet this requirement
  • not using digital links to transfer data between pieces of software, a penalty applies for every day on which a business does not meet this requirement
  • not signing up to MTD

These penalties apply in addition to existing penalties and interest charged for a range of misdemeanours from late returns to deliberate underdeclarations.

A VAT Did you know?

By   30 March 2022
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So that’s what it’s called….. From HMRC guidance – “For the purposes of establishing the place of supply of services, stallion nominations (The right to nominate a mare to be covered by a stallion in one breeding season) and the covering of mares is treated as ‘work carried out on goods’.”

Making Tax Digital for VAT – extra revenue calculated

By   21 March 2022
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HMRC has published research which evaluates the impact of the introduction of Making Tax Digital (MTD) for VAT.

The report sets out that an additional circa £185 million of tax has been collected, according to its data. This is compared to the original estimate which was that an additional amount of £115 million of VAT would be received by the department.

For businesses above the registration threshold, the estimated additional tax revenue due to MTD is an average of £57 per business. This represents a 0.9% increase from the average amount estimated had the businesses not used MTD. HMRC says that this research provides “strong evidence that Making Tax Digital is achieving its objective of reducing the tax gap by reducing the amount of errors made when filing tax returns”.

MTD background

MTD aims to reduce the tax gap by helping businesses pay the right amount of tax. The tax gap is the difference between the theoretical amount of tax that should be paid and the actual tax receipts. The difference is caused by several reasons including avoidance, evasion, and calculation errors or failure to take reasonable care when filing returns.

MTD is intended to tackle the part of the tax gap which is caused by error and failure to take reasonable care. Businesses are required to keep records in digital form and file their VAT returns using software that directly extracts information from these digital records. This should improve accuracy and remove opportunities to make certain types of mistakes in preparing and submitting tax returns, particularly arithmetical and transposition errors.

Downside

All is not sweetness and light though. HMRC has been slammed by The House of Lords Economic Affairs Committee which published a report that said that MTD for VAT cost far more than was predicted in HMRC’s impact assessments. The Committee also criticised HMRC, saying it “inadequately considered the needs and concerns of smaller businesses” and that HMRC has neglected its duty to support small businesses through the implementation of the controversial measures, suggesting it “will make life even more difficult” for them. In addition, the Committee said it “remained unconvinced” of the government’s logic used to justify the speed and rigidity with which the programme was being introduced.