Host

• Stephen Relf, Technical Manager, Tax, ICAEW

Guests

• Rob Janering, VAT partner, Crowe UK LLP
• Simon Atkins, Partner, RSM UK

Producer

• Ed Adams

Transcript

Stephen Relf: Hello and welcome to The Tax Track, the podcast series from ICAEW, exploring the latest developments in the world of tax. Reports in the press suggest that HMRC is stepping up its compliance activities when it comes to VAT. In this episode, we'll consider what businesses can do to prepare for a VAT inquiry.

[Teaser audio] Simon Atkins: There are areas in VAT which are like VAR in football. You could have several different people looking at the same issue and come up with a different response. So you do need to reveal the facts. You do need to take a judgment around what is the correct position.

SR: And we'll explore how HMRC and the government could better support businesses in meeting their VAT obligations.

[Teaser audio] Rob Janering: One of our biggest challenges is sometimes actually getting hold of HMRC. There's still lots of use of letters. My one big ask is to roll out some kind of electronic communication system.

SR: I'm Stephen Relf, a Tax Technical Manager at ICAEW. Today, I'm joined by VAT experts Rob Janering, a VAT partner at Crowe UK LLP, and Simon Atkins, a VAT partner at RSM UK. Although new to the Tax Track podcast, Rob and Simon have been active over the years in supporting the work of The Tax Faculty's VAT committee. Welcome, Rob and Simon.

SA: Oh, thanks, Steven.

RJ: Yeah, looking forward to some good VAT chat this morning.

SR: Excellent. So, Simon, as I mentioned earlier, there are reports that HMRC is taking more of an interest in VAT, including by opening more inquiries. I understand, Simon, that's your experience too. Why do you think this is?

SA: Yeah, I think it's really around the tax gap and trying to reduce that tax gap. So HMRC are under some pressure to do that. What we've seen in the news recently is, HMRC are heavily recruiting, and we're going to see a lot more VAT officers recruited over the next five years. We've seen some letters being sent out to some businesses saying that, if you haven't had a VAT inspection in the last couple of years, there's a good chance you're going to get one in the near to mid-term future. As one of the things we're probably going to cover off a bit later on in the podcast, there's been some news stories around HMRC using tech and AI to help them focus on VAT compliance. So I think VAT compliance is something that HMRC are really focusing on at the moment.

SR: So given those factors— increased use of technology, closing the VAT gap, I think it's probably fair to say that this trend will continue, at least in the short to medium term, so businesses can expect more contact from HMRC?

RJ: I think they should expect more contact, definitely. What we've had recently is no real changes to the VAT rules. It's been quite static. The government hasn't introduced any new legislation. What it appears they are doing is looking to just increase the tax take, so reduce the tax gap, and that means making sure everybody's paying the right amount and only for VAT purposes in particular, recovering the right amount as well. So to do that, it just means more inspections, more checks on businesses, and I think that means you've really got to be prepared, like Simon said, for a VAT inspection to come down the track. Definitely during COVID, they all stopped, and they're meant to happen every four years because of statute of limitations. I think HMRC will be back on track with that, so look out.

SR: In that case, what are HMRC looking at the moment in inquiries?

RJ: So from our point of view, we're definitely seeing lots of repayment returns being questioned. So that's when you are asking for a repayment of VAT in a return rather than paying any money to HMRC. So normally, you'd expect it to get released, but that's not happening. They are asking for details of all the transactions. They're asking to look at the invoices that support them. What we're definitely seeing is a lot more challenge, and that's coming from maybe a better technical expertise that HMRC have had previously. A really good example of that is where VAT might have been charged by a supplier, and normally the client or the taxpayer would think, "I can recover it." HMRC are challenging that and saying, "We don't think it's been charged properly," and just denying recovery of it, and that's a big problem because then your only recourse is to go back to your supplier. HMRC won't necessarily give you a letter saying, "This is the liability and this is our interpretation." Then you have a commercial dispute to be able to get the VAT back.

SA: I'd agree with all that, Rob. One other thing I guess we're seeing is there's a slight shift in HMRC's approach in some of the inspections around looking at governance and process. So they're trying to make sure that, for particularly larger businesses, they've got the controls in place to make sure that that is being correctly accounted for, and that's something we're seeing, a much bigger push from HMRC.

SR: I know in the past as well you've written about Project Snowball which I believe is more of a focus on processes and systems, less on technical issues. Could you tell us a bit more about that?

SA: Yeah. So it's part of the shift, I think, from HMRC looking at governance and processes. They're basically using non-tax specialists to review systems and processes to make sure that the data that actually feeds through to tax returns is robust and correct. It's really looking at the controls a business has in place to make sure about that. It's across service lines, so it's not just VAT, it's also corporation tax, employee taxes. It's really aimed at large corporates, particularly in the automotive insurance and retail sectors at the moment. Really the aim of it at the moment is to help businesses look at their controls in place and check those, provide some education to businesses around the controls that should be in place, and just look for weaknesses within the data which could lead to a tax leakage.

SR: So it sounds like that could be quite a lot of work for larger corporates. Is it voluntary? Can they refuse contact from Project Snowball?

SA: Well, I think at the moment it's fairly limited the number of Project Snowball inspections that have happened. I expect a business, as it's aimed at larger corporates, I expect if HMRC did want to do a kind of Project Snowball type approach, a business would probably be willing to do that and work with HMRC to and work with them to do those checks.

SR: So fairly limited at the moment, but I guess if it's successful it could be rolled out further?

SA: It'd be expanded out and I expect expanded out to more sectors than they're currently looking at.

SR: So then let's return to inquiries in general. And look at how businesses can prepare. And back in 2024, HMRC published guidelines for Compliance 8, setting out HMRC's recommended approach to governance, controls, and processes with regard to VAT accounting. Now, Simon and Rob, I know that you both are very familiar with this, as you wrote an article on GfC8 for ICAEW and I will include a link to that in the show notes. Now, is this guidance essential reading for a business who is looking to prepare for a VAT inquiry?

RJ: I think it probably is, and not just if it's preparing for a VAT inspection from HMRC, but actually just to best manage its VAT position. So worth saying that they are just guidelines from HMRC, so they don't have the force of law. But I think if you want to make sure you're doing things to the best of your ability and as HMRC expects, then you should be following. Definitely, you should take on board everything in there. Some bits are more appropriate for bigger businesses, others in different industries or sectors. But my key takeaway from it was that if you get something wrong doing your VAT accounting, HMRC will generally only issue a penalty if you've been careless. That means if you can prove you've taken care, you probably won't get a penalty. And I think if you can prove you've looked at GfC8, that you've taken on board some of the actions and suggestions, and you've looked to roll them out, that's a great first step to protect yourself if there's any penalties.

SA: Yeah. I think the guidance HMRC has set out is actually really helpful, and it's very detailed. I do think it's useful. I think businesses should get familiar with it. The main themes again are around that, looking at doing a risk assessment of your business for indirect tax, working out what controls you need to put in place to mitigate those risks. It really sets out the expectations of HMRC, which I think is really helpful for businesses to understand. It's interesting— one of the points in there that they talk about is where you do put controls in place. They want them to be automated as much as possible to try and remove human error. So that's something that's taking place. But as Rob says, it's got to all be done proportionate to the scale of the business.

SR: So we did mention that the guidelines are voluntary. You don't have to follow them, but clearly, as you've mentioned, there are benefits to doing so. Also, you said that in the event of inquiry, it may help if HMRC find that you have paid attention. So I guess you would both recommend that people do look at those and implement them where they can?

SA: If HMRC comes along and does find an error, it's harder to argue you've taken reasonable care, and that then exposes you to penalties. One of the things I sometimes talk to clients about is, have you done a risk register? And sometimes I slightly worry that it's just a bit more of a to-do list, whereas I think what HMRC are looking for is really a proactive assessment of the business really to understand where those risks are and put those controls in place. So I think doing that is kind of a starting point.

SR: So having the documentation in place is key?

SA: Yeah.

SR: Okay. So then GfC8 clearly can have a role to play in helping businesses to avoid errors. But what about where there's a difference in legal interpretation? Now, in a previous episode, we have discussed GfC13 which sets out HMRC's thinking where a taxpayer is considering applying a novel or improbable interpretation of the law. Is that guidance relevant here too?

RJ: I think always you should be looking to submit your VAT returns and put the right information in it, and it probably goes back to something that is in GfC8, which is around ensuring that the tax treatment is correct before you do a sale or you have a purchase and evidencing that. So have you looked at the place of supply rules? What VAT rate applies? Who accounts for it and so forth. But VAT is full of subjective cases. We've seen the KFC case come out just earlier this week, and again, that does leave some uncertainty for taxpayers because they have to use their best judgment. We know HMRC might challenge that in the future. So I think the key thing is around having a filing position and having some kind of support that you are taking the right position. So if it is challenged, it doesn't look like you've been reckless. You've spoken to an advisor who's an expert in the subject, so, not your mate down the pub who might have had a similar experience, and then just definitely documenting it. Just having a verbal conversation is not enough. Write it down, write through the steps you've gone through. If HMRC do inspect or they do challenge, at least your starting point is that "I've considered it and actually I do understand there's a risk", and I think that puts you on the front foot.

SA: Yeah. If you look at the guidance, there's a big theme in there, isn't there, around taking reasonable judgment. One of the points HMRC makes is they expect a business to apply the most likely correct approach to a VAT treatment rather than the one that might give them the best financial position. So there's that approach to it. I think as Rob says, it's one of the things you need to review all the facts. There are areas in VAT which are a bit like VAR in football, isn't it? You could have several different people looking at the same issue and come up with a different response. So you do need to review all the facts. You do need to take a judgment around what is the correct position. As Rob says, I think you need to be really careful in documenting that position. Taking advice if you need to, and documenting that position is the kind of thing that can show to HMRC that you've taken reasonable care, providing it is reasonable and has stack up. So, yeah, it's a really important area.

SR: So a business's first reaction to the news that HMRC is opening more inquiries is likely to be negative, and I think that's understandable given the additional work and the increased anxiety associated with an inquiry. But it isn't necessarily a bad thing, is it? It could be that it's a prompt for the business to review its systems and processes and to correct any weaknesses which will be of its benefit going forward?

RJ: Yeah, I would agree with all of that. So in an ideal world, you've got all of these processes in place, you've checked everything. But we know the reality is that you've-- you're running a business first and VAT maybe comes second sometimes. But if you do have that inspection, you should take the time before it happens to check your records, cross-reference what you think HMRC might look at, so that would be sales and purchase ledgers, your digital interfaces your checks for making sure the VAT return's been done correctly, and actually doing a bit of that work before the inspection will probably be good for you because it will make that more of a relaxed process as much as possible. But also, if you can then start doing that and apply it going forward after the inspection, that should make life simpler as well. Preparing for an inspection can be an enormous task for some businesses, especially where there's multiple transactions in a return period. And if HMRC asks to look at three or four VAT return periods like they often do, that's a year's worth of records and digging it all out, maybe not expense from an advisor, but time costs for the business will be stressful.

SA: Yeah. I'd echo some of those points. I mean, I think a VAT inspection can be helpful. It's a good opportunity for a business to have some time with HMRC and kind of check the VAT accounting. Talking to my clients, some of the frustration I hear is coming back to Rob's point in that HMRC can request a lot of information, and sometimes it's not totally clear why they're asking for that information, and that can be quite burdensome on a business. People are busy, and it's quite time-consuming. I think obviously when you've got a VAT inspection going on, you need to be complying and working with HMRC to resolve those queries. But I do think it's acceptable, if you're not clear why something's being asked for, that you have that conversation with HMRC. And, quite often you might end up in a position where you can actually work with HMRC collaboratively and try and get that resolution of a query sorted out more efficiently.

SR: So quite a few positives there for businesses to take away. I guess also there's something to be said about emerging from an inquiry with confidence that everything has been done correctly, isn't it?

SA: I suppose one thing that is a bit of a kind of misconception is that once you've had a VAT inspection, it's like a clean bill of health, and that's not necessarily the case. I mean, HMRC stress it's not an audit, and, we've seen scenarios where, businesses have had VAT inspections and then HMRC have gone back and then assessed for periods that have already been checked. I think there was the Real Read case recently where HMRC went out multiple times and then assessed, and the tribunal accepted that HMRC could go back retrospectively. So, VAT inspections can be helpful but I don't think people should be under the misconception that it is a complete clean bill of health.

SR: So our focus so far has been on what businesses can do to prepare for and work with HMRC during an inquiry. Is there anything you'd like to see HMRC do to help businesses to meet their obligations?

RJ: Yeah, definitely. There's a few things that could happen. I think one of them would just be better communications. So one of our biggest challenges is sometimes actually getting hold of HMRC to be able to speak to someone on the phone. I know that's been in the news and the press plenty of times. When we do get a hold of them, it's generally quite good. There's also another bit about just how they do communicate. So there's still lots of use of letters which get dated, probably sent probably to the wrong address. There's can be a mismatch with HMRC systems as to where they are registered for post, for business, for bank accounts, and so forth. I think my one big ask, and I do know this is beginning to happen, so it's credit to HMRC, but it's a big job, is to roll out some kind of electronic communication system within the HMRC portal. If we could have that, where you can pick up, even if it's a PDF letter or it's digitally written, I think we can move things forward a lot quicker.

SA: Yeah, there's a communication point. I think a lot of the guidance, like we said, came out for guidance compliance aid which has been really helpful and detailed, and it'd be good to see HMRC continuing that helpful guidance and, setting out what HMRC expectations are, providing they are commercial and making sure they are being commercial with organisations. Just from a day-to-day s-perspective, there's probably some, there's been some publicised service issues. I think most businesses, what they really want is some certainty from HMRC. The things like the non-statutory clearances, which, sometimes can be quite hard to get a meaningful clearance from HMRC, so there could be some improvement there to help with certainty and just improving on some of the response times around registrations and that type of thing.

SR: So that's HMRC, but what about the government? So in November 2025, we had the announcement that e-invoicing will be made mandatory for VAT invoices from April 2029. Do you think this will help businesses to avoid errors?

RJ: I think there's a potential for businesses to be more effective with e-invoicing. It's not being driven actually as a VAT point, but actually a business easement. So instead of having to produce a PDF invoice, put it in an email, send it out to your client, it should go straight from your ERP system over to the other party. I guess that would be great. It's going to save some time. But to get that working effectively everybody's got to be on the ball with it. So that means you've got to be prepared, you've got to have the right VAT treatments, you've got to have the right technology in place. So it might help. It might also help because there's talk about continuous transaction controls, so they might use e-invoicing to also help populate your VAT return. So some benefits. I keep thinking, though, that there will still be businesses that don't have to e-invoice. You get some invoices from overseas as well, so still a challenge. But yeah, I think there's some benefits.

SR: So the Institute's recent campaign 'How to fix VAT' highlighted a number of issues with the UK's VAT regime, including that it's too complex. I know we touched on the KFC case. Should the government be doing more in this regard?

SA: Yeah, it's interesting. I mean—complexity within the VAT scheme, there are certain areas where you feel it could be made simpler and that would help businesses. Interestingly, I think one of the articles that came out recently was around the use of AI and technology, and that HMRC are going to be using that going forward. I think that could be quite an interesting area to watch. It depends upon how they implement and how they train staff to use that. But potentially, if that could mean checks are more targeted, more specific, and it kind of reduces the time on businesses to deal with inspections, I think that could be really useful.

RJ: Yeah. VAT is a complicated tax, and I think just simplifying it. One of the reasons it's so complicated is that we've got so many rates across so many different products. You look at some other countries, and everything's subject to a standard rate of VAT, and it's relatively straightforward. We talked about the KFC case. That's where you've got chicken, and you've got a pot of dip that you put into your sauce, and they're saying that one part, the chicken, is standard rated, but the sauce is zero-rated. I mean, that's been through two tribunals now. It doesn't seem like the best use of everybody's time. But if they could simplify it a little bit, that would probably make life a lot easier, although I'm sure we'd still find some gray areas to argue over and have problems with.

SR: Yeah. The KFC case in particular, I think, is a good example of complexity, isn't it? So we have the taxpayer struggling itself to come to a conclusion, HMRC struggling to come to a conclusion. Then when they do come to a conclusion, they disagree. Then it goes to the tribunals, and the first-tier tribunal disagrees with the upper tribunal. So how businesses are expected to apply VAT rules to what looks like a fairly straightforward case, it's difficult.

RJ: Yeah. And I think they'll always struggle to do that because it's subjective, and that's where simplifying it might help a little bit. But I think that element of judgment will always be required, and that's maybe where AI, like we were talking about, could be brilliant and could speed some things up. But there's also a risk we've been talking about at Crowe, where you have AI-written papers and HMRC starts using AI to respond to you. We've just got to be really careful that we don't hallucinate, that the facts are correct, and it's pulling it from all the right sources, and ultimately using it to then be checked by professionals. But I think tribunals will always be here for VAT. Maybe we just have less of them than we do at the moment.

SR: That's all we have time for today. But given the issues we've identified with the UK's VAT rules in this episode and in the 'How to Fix VAT' campaign, I'm sure we'll return to VAT in future episodes. Many thanks, Rob and Simon, for your contributions.

SA: Thanks a lot, Steven. It's great to be involved in the discussion.

RJ: Thanks for having me on. It's been a really good chat.

SR: And thank you for listening. All of the topics we've discussed today are covered in more depth in the articles linked in the show notes. If you found this useful, then don't forget to subscribe so you never miss an episode. You can rate and share the podcast too. We'll be back next month with the next Tax Track. In the meantime, why not check out the sister podcast from ICAEW. Accounting Insights provides business, finance, and accountancy analysis, while each episode of Behind the Numbers offers a deep dive into a selected topic. And there's also The Students Podcast aimed at young professionals. To keep up with the latest developments in tax, please make sure to subscribe to our weekly TaxWire newsletter. Tax Faculty members also have access to our in-depth Tax Line articles. Thank you for listening.