91探花

Amongst the flurry of Autumn Budget announcements, HMRC quietly released the latest which revealed that the VAT gap is estimated to have grown by £1.4bn to £9.5bn in the 2023/24 tax year. With somewhat more fanfare, the government has announced that in the six years to 5 April 2030, it will increase by investing in 5,000 more HMRC compliance officers. 

Our estimates suggest that HMRC will expect around £1bn more VAT receipts as a result of these measures with no change in law. What does this mean for taxpayers and how could HMRC deliver these additional revenues even when (in percentage terms) the UK’s VAT gap is broadly comparable with the ? 

Stamping out VAT evasion - a difficult mission with little reward

Successive governments have set their sights on reducing VAT evasion. Therefore, while there’s little doubt that HMRC will invest some of its additional resources to continue these efforts, it’s unlikely that this will prove to be a particularly lucrative area. HMRC’s own figures suggest that only 9% of the overall tax gap is perpetrated by criminals, compared to 15% in 2019 when criminals were the second largest contributor to the tax gap.

Thus, it seems likely that a significant majority of HMRC’s investment is likely to be spent on policing legitimate taxpayers. But what does this mean in practice?

HMRC’s expectations are higher than ever

Earlier this year, 91探花’s freedom of information request revealed that VAT interventions were on the rise since Covid. We anticipate that the frequency of VAT audits will continue to increase and so, while most taxpayers haven’t seen an HMRC VAT officer for over four years (the rate of enquiry that HMRC is aiming for), it seems likely that they will have a visit before the next general election. 

While these visits will continue to look at VAT returns over the course of the last four years, HMRC’s recently published compliance guidelines make it clear that they will expect a significant level of diligence in the VAT compliance process. Based on our work with clients trying to respond to these new compliance guidelines, many businesses are not devoting as much time to VAT compliance as HMRC would expect. Therefore, these VAT audits might lead to some nasty surprises.

The cost of getting it wrong

Much has been made of the increase in late payment interest rates that were part of the Budget announcements. However, in our view there is significantly more VAT risk to taxpayers from a shift in HMRC policy on the application of penalties. To date, HMRC has adopted a pragmatic application of the somewhat subjective penalty rules. 

However, our work with clients suggests that HMRC often agrees to reduce these penalties and in most cases, any penalty is suspended with pragmatic measures in place to ensure improved compliance in the future. However, we have noted that HMRC is now verifying these suspension conditions for the first time. A hardening in HMRC’s approach here could end up being expensive for taxpayers.

What does this mean?

HMRC will no doubt feel the pressure to make a return on the investment that the government intends to make. This means that taxpayers must be more diligent than ever to avoid unexpected VAT costs and penalties.