VAT compliance life-cycle

In this article, David Reaney and Emma Robinson explore some fundamental aspects of the VAT compliance life-cycle and encourage readers to take time to check if they should improve their approach.

Over the last few weeks families across the country will have been getting ready for the return to school. Familiar routines of new school shoes and backing books have now been complimented by numerous WhatsApp groups and online sign-ups.

As we reflect on this busy time of year there is a strong sense of revisiting old routines and establishing new patterns. In the midst of all the preparations, we wonder might there be some pointers to help us to assess our VAT compliance approach?

New equipment

To set pupils up for a new year of learning lots of equipment will be purchased. From school bags to sports equipment to calculators the list is extensive. This equipment delivers what is needed for the pupil to make the most of school.

In many ways this is like the software used for your VAT compliance, be that your ERP system, a specific tax engine, Excel or a combination of these. Your software is fundamental to your VAT compliance process.

Many businesses are using old software which doesn’t cater for the requirements of modern VAT compliance. This often leads to increased manual intervention and a significant time involvement for the finance/tax team. Is this the year to consider some new software, to upgrade the version of the software you use or to add a tax specific module into your process?

The doorstep photo

At this time of year, family WhatsApp groups are busy with photos on the doorstep with pupils looking pristine in their new uniform. This results in a level of scrutiny which is unmatched at any other time of the year, mostly commenting on how much they have grown.

Now is a good time to reflect on the review steps involved in your VAT return process. Some businesses still rely on one person to complete the VAT return and no effective independent review and sign-off takes place. A fundamental control for all VAT returns should be a ‘4-eye’ review by another member of the team with the appropriate expertise to undertake that review.

If this step is not undertaken or is not sufficiently consistent or rigorous then now is the time to revisit this.

Uniform getting bigger

The new school year will see some pupils with new shirts, trousers, blazers etc generally due to the fact the old uniform no longer fits.

For most businesses change, and hopefully growth, will occur each year. This might include a diversification of sales/products, new customers, new markets and change in costs.

Many businesses will operate some form of apportionment in their VAT compliance process, be that a partial exemption method, business/non-business calculation or under the Capital Goods Scheme. Each of these calculations requires consideration of the changes in the business.

Often businesses roll-forward a percentage which has been used previously and it isn’t updated for new circumstances, or reviewed periodically.

If this is relevant for you, you should take some time to consider each of the apportionments applied in your VAT compliance process to assess if they are still appropriate.

Assembly

When the pupil finally makes it to school for that first day they are likely to head straight to the assembly hall to be welcomed back and to be reminded of the school rules and expectations for the year ahead.

VAT is an evolving tax, with new rules and guidance emerging across the year. As with school rules, it is vital for businesses to understand and stay up-to-date with the VAT rules applying to their business.

As well as staying on top of case law developments and new publications from HMRC, recently HMRC set out the expectations for VAT compliance controls in the Guidelines for Compliance 8 publication. Businesses should familiarise themselves with this as they consider improvements to their compliance approach.

School inspection

Finally, turning to the teachers, most teachers will embark on the new school year wondering if an inspection will be announced.

With an increase in HMRC compliance activity in recent years, businesses should take time to consider how prepared they are for a VAT visit/inspection from HMRC.

Key to this will be the mapping of their VAT return process, including assessing the digital links at each step in the process, and the documentation of processes and procedures that they have in place.

This article originally appeared in TaxPoint, Chartered Accountants Ireland and is reproduced here with their kind permission.

Get in touch

We hope the back-to-school analogy has been a light way to highlight some of these really important issues. However, regardless of your involvement in the return to school, as we all move away from the summer and into the autumn and are thinking about the year ahead, there is an opportunity to pause and assess our VAT compliance position and this should include:

Understanding the requirements under the VAT legislation, including the Making Tax Digital rules;
Understanding HMRC’s expectations as outlined in Guidelines for Compliance 8;
Considering the risks and appropriate controls and documenting these;
Considering the apportionment methods and other adjustments applied in your VAT returns to ensure they remain appropriate;
Considering your readiness for an HMRC inspection; and
Considering whether the software (and the version of the software) used is appropriate to meet you VAT compliance requirements.

We would be happy to explore these issues with any reader who would find that helpful.