Why HMRC’s latest reforms matter

Tax teams experienced a wake-up call in September last year when the government announced a consultation on e-invoicing and published new guidelines for VAT compliance.

The two announcements, just days apart, were further evidence of a growing compliance burden and HMRC’s increasing assertiveness around communicating expectations to taxpayers. The measures are part of a much broader HMRC strategy to raise compliance standards by getting taxpayers to focus on improving data quality, reducing manual processes, and then better targeting enforcement action at higher risk taxpayers.

Understanding Guidelines for Compliance 8 (GfC8)

Guidelines for Compliance 8 (GfC8) sets out HMRC’s most comprehensive view to date, on how businesses should approach VAT compliance in terms of identifying risks, ensuring VAT processes and controls are appropriate, documenting key processes, and testing that controls are operating effectively.

Whilst a significant focus is on the preparation of the returns – where HMRC mention over 120 possible checks that a business may need to perform once data is downloaded from the system – the guidance covers the full transaction journey from master data, through accounts payable and accounts receivable, and each system and report until it ultimately appears on the VAT return.

Although these guidelines apply to all VAT registered businesses, it is clear that HMRC is leaving it to individuals to interpret what is appropriate for the size and complexity of the business, which is creating significant uncertainty. HMRC have been issuing letters to large businesses directing them to the guidance and asking them to assess their current position. We are also seeing more detailed enquiries about processes and controls as part of penalty discussions – the guidance provides HMRC with a clearer framework to consider whether taxpayers are taking reasonable care. For larger businesses it will also inform HMRC’s approach to Business Risk Reviews and Senior Accounting Officer certificates.

Real-time data and transactional reporting: the impact of e-invoicing

When HMRC announced the introduction of Making Tax Digital in 2019, they made clear that transactional level reporting of purchases and sales would eventually replace summary VAT returns. Whilst this may not have emerged as HMRC originally envisaged, the introduction of e-invoicing will potentially provide HMRC with access to transactional data in real time – and the ability to block invoices which do not meet certain minimum standards. In that context, GfC8 should very much be seen as a wake-up call for businesses to ensure their approach to compliance is robust.

Any changes resulting from the e-invoicing consultation in the UK could be announced as early as the Autumn Budget.

However, with real-time transactional reporting already mandatory in several countries, and many others moving this way, it’s likely to be the global standard by the end of the decade. Whilst penalties for non-compliance can be significant (or punitive in other jurisdictions), the greatest risk to businesses arises from the potential commercial disruption, particularly where advance approval of e-invoices is required.

Outside of e-invoicing and transactional level reporting, HMRC is already routinely requesting vast volumes of data as part of audits or through campaigns focusing on known areas of non-compliance. By testing data, benchmarking businesses against their peers and cross-checking returns between different HMRC departments and with other tax authorities, HMRC are able to target enquiries towards higher risk taxpayers and transactions. Through this lens, the concept of a “permanent” tax audit, is not that far away.

How businesses can strengthen VAT compliance

Despite HMRC’s evolving approach to compliance and enforcement over the last five years, businesses of all sizes continue to grapple with data quality, systems limitations, manual processes and control gaps. Often, cross-departmental collaboration is needed to address issues in transactional taxes such as VAT. In order to secure investment (internal buy-in, technology, target operating model etc.) the indirect tax strategy needs to be aligned to broader business goals. It also needs to be accompanied by a set of measurable KPIs that properly reflect current risks and opportunities.

In relation to these recent changes, tax leaders should focus on:

Building proportionate controls around your VAT risk profile

HMRC’s GfC8 made it clear: taxpayers must be able to show that their controls are logical, meaning they are appropriate for the size and complexity of the business and focus on addressing its most material challenges.

Context is important – there is a need to adopt a top-down approach to risk, defining the VAT profile of a business and demonstrating how its controls match its VAT risks. It will be increasingly important to develop frameworks to measure performance against standard risk indicators, and investing in centralised systems to ensure the consistency, accuracy and scalability of VAT data, especially when operating across multiple jurisdictions.

Enhancing VAT accuracy through data analytics and continuous testing

HMRC have invested significantly in data analytics. As a minimum, businesses should be able to replicate, and ideally exceed, the kinds of data checks HMRC can perform. Manual processes and spreadsheets won’t withstand this level of scrutiny. Businesses should be looking at the business case for implementing advanced analytics and AI-enabled technologies that can gather, enrich and test data to identify high-risk transactions and patterns across millions of records.

Be prepared for global VAT compliance changes

Compliance isn’t static. Businesses must be ready for changes that could disrupt continuity or increase compliance costs, both in the immediate and longer term. These could be internal (such as new systems or M&A) or external (such as new legislation and global mandates like e-invoicing). Tax leaders should horizon-scan and consider what people, technology and skills their functions will need over the next five years to stay on top of compliance demands.

Turning VAT data into a strategic asset

Many businesses will need to modernise their VAT compliance function or risk falling behind their peers and below HMRC’s expectations – with potential reputational and financial consequences, both for key individuals and the business as a whole.

However, strengthening VAT processes need not just be about persuading tax authorities to trust your processes, but can also be an opportunity to drive savings and efficiencies. By reframing the exercise as a lever for business value, you can stop seeing VAT data as a compliance burden and discover its power as a strategic asset.

For further information, please contact Rowena Clifton.

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