Managing the hidden risk of VAT

20 October 2016

Ian Carpenter

VAT is often considered a remote risk for businesses. However, a recent tribunal case highlights the real reputational and financial risk that inaccurate accounting processes can cause.

The case in question involved a sole trader with a poor compliance record who fell into the VAT default surcharge regime for failing to file and pay VAT due by the appropriate dates. On seven successive returns, the taxpayer failed to pay the right VAT at the right time. However, as these returns had only small VAT liabilities, the nature of the VAT default surcharge regime meant that the taxpayer only suffered £298 in penalties for the late payment of the VAT due to HMRC.

The eighth default was different. In this VAT period, the taxpayer had disposed of land worth over £10m and, although the filing and payment of VAT was only five days late, the cumulative effect of the default surcharge regime meant that a penalty of 15 per cent was due on the tax payable. This equated to £217,701 for paying VAT one week late.

Abnormal transactions carry greater risk as they fall outside of the normal accounting process and they are, by nature, infrequent. This coupled with inadequate data collection and management processes mean that material errors in returns can lead to default surcharges for late payments, and penalties of between 30 and 100 per cent of tax unpaid in cases of error; with HMRC being able to assess for any errors up to four years in arrears.

While much of the media spotlight focuses on corporate taxes, it should be remembered that VAT revenues dwarf those collected in corporation tax. Indeed, in the period from August 2015 to July 2016, the VAT ‘take’ for the UK government was a staggering £117bn. 

Following the UK’s recent vote to leave the EU, there is little doubt that there is likely to be increased scrutiny on indirect taxes as the government tries to ensure the impending period of change does not impact VAT revenue collection – so now would be a good time to take steps to improve accounting processes and mitigate any risk from any VAT issues.

If you would like to discuss any of the points raised, please contact Ian Carpenter or your usual RSM contact.