HMRC guidelines for compliance: VAT

HMRC has recently published a series of guidelines and guidance notes under its new Guidelines for Compliance (GfC) banner. The stated purpose for these new guidelines is to provide greater clarity around HMRC's compliance expectations and help taxpayers to avoid non-compliance. HMRC will generally consider that businesses following GfC as lower tax risk, reducing the need for contact with HMRC and the risk of paying additional tax, interest and penalties.

The most recent of the GfC deals with VAT compliance (GfC8). As such, those responsible for VAT compliance within an organisation should be familiar with these guidelines going forwards. The guidelines are detailed and wide-ranging in relation to the processes and controls that businesses should have in place to meet HMRC's standards and be regarded as low risk from this perspective. Indeed, businesses may be surprised at the extent to which the guidelines set out not only those processes and controls that HMRC expect to see, but also the need to fully document them and the decision making processes involved in them.

We see this as a new and important development within HMRC. Other areas, such as transfer pricing, have long recognised the need to fully document decision making processes as well as contractual and transactional elements within the supply chain. However, the focus on the need for documentation with the GfC for VAT appears to be new and it will be important for businesses to take this new element on board in their processes and planning going forwards.

Whilst openness and transparency around HMRC's expectations is to be welcomed, businesses may ultimately consider that HMRC has raised the bar for compliance in a way that will be administratively burdensome for many.

Background

The intention to publish Guidelines for Compliance was first announced in November 2021 as part of the review of tax administration for large businesses. The then government announced that it would invest in HMRC to enable HMRC to develop a programme of new "Guidelines for Compliance" to provide practical guidance and greater transparency on the approach HMRC regards as high or low risk behaviour and HMRC's response. At the time, it was expected that the guidelines would be delivered by mid to late 2022. In practice, it has taken much longer than might have been expected for the guidelines to appear, with most of the current guidelines being published in September 2024.

The GfC set out HMRC's recommended approach and are designed to help taxpayer's understand HMRC's expectations when planning, implementing and reviewing the accounting and compliance processes that ensure tax is accurately declared.

Ultimately, the aim is to reduce uncertainty for UK businesses by providing greater clarity and transparency of HMRC's compliance expectations, highlighting approaches that can lead to inaccuracies and the need to pay more tax, interest and penalties. They also offer HMRC's insights into the practical application of the law and HMRC's administrative approaches, expanding the scope of HMRC material, beyond interpretation of the law.

So far, GfC have been published covering a number of areas, both broad and highly targeted, including GfC for employers, corporation tax, transfer pricing and, most recently, VAT. Our earlier article on the GfC for transfer pricing can be found here.

Importantly, GfC can be used to verify HMRC's "known position" for purposes of the Uncertain Tax Treatment (UTT) legislation. See our previous Insights article on UTT here.

The GfC for VAT

The GfC for VAT refer heavily to the use of business systems and processes for VAT compliance and the controls that businesses might put in place to reduce risks of errors within these processes. HMRC very clearly state that where risks are identified, they expect taxpayers to work towards improving compliance and review those systems and processes more often. As such, it will be particularly important for those responsible within an organisation for VAT governance to be particularly familiar with the guidelines, including any VAT and tax managers and the designated Senior Accounting Officer.

However, there is recognition that the guidelines are not necessarily "expected to apply equally to all businesses" and that risk management will be "tailored to the size and complexity of an organisation".

In general, the document General Approach to VAT compliance controls (Part 2) makes it clear that HMRC expect to see that businesses have processes to identify risks of non-compliance through the use of appropriate tools and procedures, which should be regularly evaluated. Each process should have an owner, employees should be aware of their responsibilities within the process and there should be independent evaluation of risks and controls.

The GfC also emphasise HMRC's expectation that businesses, especially if large or complex, should have well documented compliance processes. HMRC consider that a well-documented process would:

• have clear ownership and accountability
• include sign-off at the appropriate level
• be regularly reviewed and updated
• be version controlled
• cover the complete process under review
• include clear step-by-step sub-process guidance
• include checklists to help with completeness and task deadlines
• be easily understandable, to help with deputising and succession planning.

The guidance also stresses the need for internal controls to be well documented. HMRC stress the need to evidence the design and effectiveness of internal controls through documentation, whether to support risk management or support SAO sign-off. HMRC expectations for good practice for control documentation include:

• documents should define the scope of internal control for VAT purposes in terms of business functions, processes, IT systems and locations
• document whether VAT relevant internal controls are in-house, shared service centre or outsourced to a third-party
• document the flow of transactions through in-scope functions and processes, and identify the control activities within these processes
• process documentation is up to date and version controlled.

The need for documentation also arises in relation to the assessment of controls and people functions. HMRC suggest use of a VAT risk register to document VAT risks identified, the nature, type and frequency of control activities, how the control activity is performed, how testing of the effectiveness of the control has been planned and performed and how the control will be monitored. In relation to people, HMRC suggest documentation of staff roles and responsibilities, which should be referenced as part of staff training, as well as having clear processes for training, escalation of VAT issues, contingency and succession planning.

As well as the more general guidance notes on General Approach to VAT Compliance Controls (Part 2), the GfC for VAT includes a number of documents dealing with specific processes including:

• order to cash
• procure to pay
• employee expenses
• record to report
• VAT reporting
• correcting errors.

Finally, HMRC provide guidance on outsourcing the VAT compliance processes and obligations. Yet again, the GfC highlights the need for businesses to document the key stages involved in outsourcing, including feasibility studies and requirement analysis, shortlisting, tendering, bid evaluation, service contract drafting, implementation and monitoring. HMRC make the point that outsourcing VAT compliance does not outsource the risk and legal responsibility for VAT compliance. The HMRC guidelines in this area provide a surprising amount of detail as to their expectations of the way in which a business might go about approaching, structuring and implementing any outsourcing project.

Comment

These new guidelines should be required reading for affected businesses in indicating HMRC's expected benchmark for compliant VAT policies and processes going forwards. Those responsible internally for VAT compliance, from VAT managers to those responsible for tax at Board level, will now be expected to be familiar with HMRC's expectations.

What is very notable in the GfC for VAT is the focus on documentation. HMRC will not only expect a business to have rigorous and effective processes and controls, but, essentially, they will expect the business to have documented those controls and processes in a way that demonstrates not only those controls/processes but the fact the business has approached the need for such controls/processes in a serious and responsible manner.

In our view, the process that HMRC has itself undertaken in putting together the various GfC seems to have shifted its focus to this need for contemporaneous documentation of the tax function. The need for such documentation to demonstrate both policies and activities has long been common in some areas, such as transfer pricing, but HMRC now appear to be focussing on this requirement in other areas, including VAT. It appears that the lack of documentation around the decision making process may impact on HMRC's approach to the imposition of penalties, for example.

Indeed, we have recent experience of this new approach in practice with HMRC requiring contemporaneous documentation to be provided at short notice in relation to VAT technical positions taken by the business, even when they are non-contentious and in line with HMRC's current guidance.

Moreover, looking at the guidelines, one is struck by the level and detail of compliance materials that HMRC might expect to see. This begs the question: to what extent has the publication of these guidelines led to an increase in the quantum of compliance expected by HMRC? Or is it simply that they reflect what taxpayers and advisers have been seeing over a number of years?