HMRC issues new guidelines for VAT compliance

In September 2024, HMRC released its Guidelines for Compliance 8 (GfC8), which set out its most comprehensive view to date on how businesses should approach VAT compliance in terms of:

• Identifying risks.
• Ensuring processes and controls are appropriate.
• Testing and documentation, to evidence that their approach is effective.

The guidelines cover:

• Key principles when looking at the design of the VAT compliance control environment.
• The end-to-end VAT compliance process, including examples of how risks arise and how they might be mitigated - from when data is first created in system configuration, in supplier and customer master data, through accounts payable (AP) and accounts receivable (AR) transaction processes, to an entry appearing on a VAT return that is submitted to HMRC.
• HMRC’s expectations regarding:
  • The documentation of risks, key processes and controls.
  • The need to test controls and carry out independent evaluations of their effectiveness. 

Who is impacted by the GfC?

The guidelines apply to all VAT registered businesses. However, it is clear that HMRC is leaving it to individual organisations to consider and interpret what is appropriate for their size and complexity, which may suggest the need for professional advice in some cases.

How will HMRC use the guidelines?

HMRC has started issuing letters to large businesses directing them to the guidelines and asking them to assess their current position. Recently, we have seen more detailed HMRC enquiries about processes and controls as part of discussions in VAT compliance checks – in this regard, the guidelines provide HMRC with a clearer framework to consider whether taxpayers are taking reasonable care over their compliance. For larger businesses the guidelines are likely to inform HMRC’s approach to business risk review plus (BRR+) meetings. They may also inform the work required by businesses to support annual senior accounting officer (SAO) compliance certificates. 

What do businesses need to do?

It is important that VAT registered businesses consider the impact of the guidelines. The first step will be to assess how they measure up against the guidelines (and how they perform compared to peer organisations). As many of the controls are likely to fall outside of the remit of those responsible for tax in the organisation (eg in AP and AR departments) it will be necessary to involve other stakeholders to understand the current approach and assess its effectiveness. The assessment of a business’s VAT return preparation process, including the effective use of data testing and trend analysis, forms a significant part of HMRC’s analysis. The current VAT compliance approach should therefore be reviewed in light of over 120 possible risks and controls that HMRC has outlined.

How soon will action need to be taken?

The key here is to have a plan to be able to demonstrate to HMRC that progress is being made. In this regard, during its 2024 annual conference, the Labour Party announced a consultation on the introduction of e-invoicing in the UK. This should also focus minds, as it will ultimately provide HMRC with access to transactional data in real time – and the ability to block VAT recovery on transactions for which invoices and other documentation does not meet certain minimum standards. This is therefore an opportunity for businesses to ensure their approach to VAT compliance is robust, ahead of HMRC increasing its routine access to taxpayer data.  

For more information, please get in touch with Rich Holm or your usual RSM contact.