Recently, HMRC announced that it is seeking up to £13.3 billion in VAT that it suspects was underpaid by businesses last year.
This is known as the “VAT Gap”: the difference between the amount of VAT that should, in theory, be collected and what is actually collected. This gap in revenues means HMRC will not tolerate any non-compliance in this area and will likely be building on its investigations into small businesses.
The latest VAT Gap statistics show that it has increased from £12 billion in 2016/17 to £13.3 billion in 2017/18, the highest level on record. The substantial increase in the VAT Gap is a good indicator that HMRC will be increasing its compliance resources in this area.
HMRC believes that small businesses in the UK are one of the major underpayers of VAT. This is based on the fact that many SMEs often deal in cash-based transactions, which may increase the likelihood of them understating their income. Traditional targets of these investigations include plumbers and electricians; however, restaurants, bars and other retailers are now being added to this list.
VAT is an important revenue stream that HMRC are keen to protect and maximise; VAT investigations have already led to the collection of an extra £3.75 billion last year, a 12% increase from 2016/17.
Businesses can expect greater scrutiny of their VAT returns as HMRC attempts to eradicate non-compliance. Therefore, it is crucial to take care when filing VAT returns as mistakes may trigger costly, time-consuming and disruptive investigations.
There are also other tools at HMRC’s disposal, such as Connect and the Common Reporting Standard , which provide cross-border automatic exchange of information, which it will not hesitate to use. If HMRC believes businesses have made a careless or deliberate mistake on a VAT return, then it can impose penalties of up to 100% of any understated tax.
Gerald Edelman works with tax specialists, PfP, to provide a Tax Investigation Service, which will help to protect you against a potential HMRC investigation, in the absence of fraudulent activity. To find out more, or to subscribe to the service, contact your Partner at Gerald Edelman.Back to top