What HMRC's VAT compliance guidelines mean for larger businesses

Who are the new guidelines targeting?

In general, the guidelines are written for larger businesses, although HMRC has confirmed they apply equally to public authorities and non-profit organisations. Given they impart best practice advice, many smaller and medium-sized businesses should also consider their content.

Conversely, some parts of the series deal with particularly complex and contentious areas and so may only apply to a niche group of businesses. 

Should you read and act on the new guidelines?

Yes. While the guidelines are not mandatory, many components are comprehensive and provide a wealth of information on what processes a business should have in place and expected control levels.

Who should take ownership within a business?

Where the guidelines cover end-to-end processes, for example with GfC8 VAT - Help with Compliance Controls, we would recommend the chief financial officer (or the senior accounting officer - SAO), with the head of internal audit, take ultimate responsibility. Elements of the tax process will be delegated to other responsible officers, including the head of tax, accounts payable, accounts receivable, payroll and HR.

Are there penalties for non-compliance?

Not directly. However, if in applying the guidelines, HMRC identifies an organisation has poor tax governance, then they are more likely to rate the company as having a higher risk, for example as part of a Business Risk Review (BRR+). This could mean increased HMRC scrutiny, which can have both an operational and financial impact and may in turn lead to penalties for compliance failures.

Good governance can also support streamlining tax reporting, creating its own efficiencies and reducing the risk of reporting errors.

GfC8 VAT - Help with Compliance Controls

GfC8 provides detailed recommendations for managing an entire VAT function, incorporating governance, end-to-end processes and finance systems. They are intended to help taxpayers develop their own compliance strategies and approach to tax risk and governance. HMRC acknowledges that businesses will handle VAT compliance differently based on their complexity and scale.

The recommendations outline best practice, risk management, outsourcing, documentation and the use of data. Additionally, they address compliance controls for employee expenses, outsourcing, manual adjustments and error corrections.

GfC7 – Transfer Pricing

GfC7 has wide-reaching coverage and considers the following issues:  

• How UK risk leads manage their transfer pricing compliance. 
• Common compliance risks encountered by HMRC. 
• Indicators of transfer pricing policy design risk.  
• Examples of helpful supporting records and information, with a specific note on the value of real-time evidence.

1. Seek buy-in from relevant stakeholders

• Sign-off: the SAO or board are ultimately responsible for the reporting of tax and should support good tax governance.
• The wider business: compliant tax reporting relies on information and data received from across the whole organisation. Every person has a part to play.

2. Consult with experts

• Consider engaging a tax risk governance specialist or tax adviser to help navigate the complexities of the new guidelines.

3. Compare and contrast

• Review your existing systems, processes and controls. Determine how they align with the new guidelines and identify any gaps.
• Map responsibilities. Define who is accountable for which elements throughout the end-to-end process.

4. Update systems and procedures

• Modify your accounting systems and procedures to align with the guidelines. This could include updating software to handle new reporting requirements.

5. Documentation

• Establish robust practices for maintaining suitable records, references and charts. Ensure that all tax-related processes are well-documented and easily accessible.
• Disseminate relevant information to the stakeholders in the business.

6. Recognise risks

• All businesses should identify and balance risks, including potential tax reporting issues, accepted system shortfalls or resourcing.  
• The approach to tax risk should be aligned to the firm’s wider risk practices plus your overall tax strategy.
• Best practice indicates large businesses should have a specific tax risk register which aligns and feeds into the main business risk register.

7. Training

• Ensure that your HR, payroll, systems and accounting teams receive regular training and guidance applicable to their roles. This may involve periodic workshops or external training sessions.
• Provide accessible and practical instructions, guidance and manuals.

8. Engage with HMRC

• Maintain open communication with HMRC. If you have specific questions or concerns, reaching out for clarification can help avoid future issues.
• Identifying and reporting errors can actually be a good indicator that suitable controls are in place and are working. 

9. Testing and refreshing

• Set up a system for regular audits and reviews of your tax processes to ensure ongoing compliance and address any changes in legislation promptly.
• Ideally, these should have a level of independence rather than be led by the head of tax. Work with existing internal audit functions or an adviser.