VAT: the tax most likely to keep you awake at night. But should it?

Our latest survey to understand how businesses perceive VAT and the challenges it poses finds considerable disquiet about this complex tax. VAT continues to be the area of tax seen as posing the biggest risk to companies – even more of a risk than was perceived last year. In this year’s survey, 40% of respondents think VAT poses the most risk to their company over the next 12 months, up from 35% last year. Corporation tax ranked second this year, with 32% of respondents identifying it as their main tax risk over the next 12 months.



Despite admitting such high levels of concern, only 28% of respondents said they had a written VAT policy or process document. This is a concern – and an issue businesses are encouraged to put right. A VAT policy or process document need not be complicated to draft, but it should typically cover issues such as responsibilities and roles for compiling VAT returns – including who makes the VAT payment and who is responsible for evaluating VAT-related risks – and what controls are in place in relation to VAT compliance.

In contrast, well over half (56%) of survey respondents this year have a plan in place for Brexit – up from 27% last year. This is particularly impressive given the difficult Brexit negotiations and continued uncertainty about the nature of the final agreement and the UK’s relationship with the EU.

Inspections continue

Just over half (52%) of respondents have had a VAT inspection in the last four years, a slight increase on last year’s finding (49%). This is despite HMRC’s current preferred policy of conducting fewer visits and handling more issues remotely. The surprisingly high number of VAT inspections reflects the complex nature of VAT, as does the fact that businesses are more likely to have had a VAT inspection than to have experienced any other form of tax investigation. Only 28% of respondents have had any other form of tax investigation during the last four years.

Investigations can be intrusive and disruptive. Of the businesses that have undergone some form of tax investigation, 57% feel that it demanded too much time from senior management and 86% think that HMRC is taking a tougher approach towards investigations of businesses. However, 86% also feel that their investigation was conducted in an even-handed manner, although only 74% think HMRC staff were competent. Overall satisfaction levels are high: 100% of respondents think the outcome of their investigation was fair.
 


Missed opportunity for free help?

Even though many businesses see VAT as a high risk area and VAT inspections are widespread, relatively few are making use of the free help available to them from HMRC. Only 16% of respondents contacted the HMRC National Advice Service in the last 12 months. Respondents are taking advice from other sources such as VAT specialists (60%) and auditors (40%), but not taking up free help would appear a missed opportunity. Only 12% receive advice from in-house VAT specialists.

Businesses that did seek help from HMRC’s National Advice Service asked about a variety of issues, such as the VAT treatment of new income streams, partial exemption, real estate elections, the reverse charge rules, VAT charges to charities and government organisations, and the increase in Insurance Premium Tax. Every respondent who had used the service said they had received a satisfactory response.



Confidence concern

Survey respondents identified a wide variety of challenging issues that they have faced over the last 12 months, from partial exemption through to VAT recovery for groups. The range of issues helps to explain why VAT is considered such as risk. It touches on so many business activities, including one-off transactions.

It’s not surprising, therefore, that only 45% of respondents feel relatively highly confident (scoring 4 or 5 out of 5) that their awareness of current VAT developments is up to date. Just over two-thirds (68%) of participants feel relatively highly confident about their general VAT compliance – suggesting a reasonable amount of uncertainty about many of the VAT returns being filed.

Conclusion

HMRC’s Annual Report & Accounts for 2016 show that VAT is the tax authority’s second largest revenue stream, accounting for 22% of the total (behind 30% for income tax). It’s therefore an important area of focus for inspectors, not least because of the many complexities in the detailed rules. These complexities are also reflected in this year’s survey. Businesses consider VAT their biggest tax risk because the potential to get things wrong is so great.

It is therefore highly surprising that so many businesses fail to prioritise writing down clear VAT policies and procedures. The unexpected absence of a key knowledge holder at a critical time can jeopardise the accurate and timely completion of VAT returns. Making sure all roles, responsibilities, procedures and controls are documented could go a long way towards reducing the risks that businesses perceive.  

We received responses from businesses across the UK with annual revenues ranging from over £100m to less than £1m. Participants – typically CFOs and financial controllers – came from a variety of sectors including insurance, professional practices, retail and wholesale, technology and telecoms, shipping, real estate and construction, manufacturing and hotels.

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