Thinking ahead on VAT compliance

Before the inspectors come calling, it pays to give your business a VAT healthcheck.

An annual VAT healthcheck is essentially a review of the VAT practices of a business – something akin to a mock VAT inspection but with added benefits.  It is a reassurance that your VAT affairs are in order, which will give you peace of mind – and additional credibility – if an inspection is called. Of course, in the current climate, there is a lot of pressure for the taxman to bring in more money, so scrutiny is only likely to increase. In addition, a healthcheck is an opportunity for a friendly VAT expert to look at ways in which the business could improve its VAT position – something the VATman won’t necessarily tell you!

A starting position will be looking at fundamentals such as where VAT should and shouldn’t be charged.  A common area here is cross-border compliance.  Although the regime was simplified in 2010, it’s still a confusing world which many of our clients find problematic.  There’s also the issue of expenditure and whether a client has claimed back VAT in areas they shouldn’t, specifically of expenses such as business entertainment, which is a common target of the VATman. 

After the healthcheck, it’s normal to write a report outlining findings, quantifying errors and suggesting ways of dealing with them.  Our recommendation would always be to disclose any mistakes, as this openness with HMRC will be a mitigating factor when it comes to deciding on penalties. However, if you’ve been prompted to make a disclosure by, say, the threat of an inspection, it’s more likely that a penalty will be imposed. The fine can be up to 30%, but can often be mitigated down or sometimes be waived altogether.

It’s a mistake to think that all VAT issues will be uncovered by regular accountancy work unless it’s been specifically agreed as part the terms of engagement with your accountant. This is one of the things that makes the VAT healthcheck so essential. But how much work is actually involved? Well, it will probably depend on whether you’re asking your adviser to look at a specific issue or simply asking for them to take an overview and highlight any identified areas of concern. It may also be that you’re able to do some of the groundwork yourself, which would reduce the time commitment and fees of your accountant.

A typical scenario might lead to uncovering an underpayment of VAT.   A client might then choose to engage us to handle that issue, manage the process and get things sorted out with HMRC. On the plus side, it may be that the healthcheck identifies efficiency savings which can then reduce the debt.

Overall, if the Revenue can see that a VAT healthcheck has been undertaken, they may well take comfort that you are acting responsibly and doing your best to comply with regulations. This will ultimately make your life easier so it is good sense to think ahead and to work proactively with your accountant in this complex area.