VAT, when it was first introduced, was described by the then Chancellor as a “simple tax” , and 48 years later even with the UK withdrawal from the EU (whence the VAT system originated) we find VAT is the biggest single tax contributor to the TAX gap in the UK for 2020.
The findings in this HMRC report indicate that missing VAT accounts for 35% – that’s £15.1b of the overall Tax Gap estimate of £35b. But what’s the driver to this missing VAT? Complexity of VAT itself is no doubt part of the cause and it’s never a surprise that lots of businesses simply struggle to understand all the nuances. It’s the Small and Medium Sized business community, the SMEs, that as a sector bear the brunt of the loss at 43%.
Is VAT too complicated for SMEs?
What is clear from the direction tax management is going in general is that HMRC is continuing its drive for improvement in tax reporting by the tax payer themselves. Consultations for simplification in a range of VAT management areas continue to go unanswered. SMEs will have to struggle on in their role as an “unpaid” tax collector not just in respect of their own tax affairs but increasingly in checking up that their suppliers have correctly managed their own VAT affairs as well.
We’ve seen examples where businesses have been taken to task by HMRC for failing to check whether their suppliers should be VAT registered or whether the VAT registration number they’ve used is correct.
It’s reasonable to expect that this wider management trend to avoid any risk of complicity challenges when VAT errors arise will continue as HMRC seek to narrow this VAT gap.
VAT in the Time of Covid-19
As we move out of Covid constraints we are starting to see HMRC return to their revenue protection role but often that’s through sector wide approaches on the areas of risk they perceive. Whilst physical visits may be slow to return, the ability of HMRC to access relevant data from a wide range of sources to check a tax payers records will continue. A good example of this is their ability to access records of credit card transactions to compare to declared sales across businesses in the hospitality sector.
Am I a target?
HMRC will more likely target sectors where they perceive the greatest VAT risk than single out individuals, but as ever once a taxpayer falls under their radar for review do not doubt the level of scrutiny that will follow.