Insights

VAT is in the spotlight again for SMEs and according to new research, in 2018-19 HMRC collected £4.4bn from SME tax enquiries (£3.8bn in 2017-18) and £1.7bn came from VAT enquiries.

This additional revenue was generated by opening enquires into suspected underpayments of VAT among small business owners and collecting the subsequent additional tax due.

Apart from highlighting how important it is to file accurate VAT returns, it illustrates the benefits of having tax enquiry insurance to cover professional fees if HMRC decides to undertake an enquiry into tax payments.

What is the VAT gap?

When HMRC opens an enquiry related to VAT compliance, they are investigating a potential “VAT gap”. This is the difference between the VAT that HMRC thinks it should have received from a business and what it has actually collected. The amount is based not only on historical performance, but also industry benchmarks that suggest what similar businesses are paying. In addition, HMRC receives a wealth of intelligence from third parties – banks and trade associations being the most significant for business owners.

Businesses that trade with a lot of cash – street food vendors, market stall holders, cafes and restaurants, taxi drivers, personal trainers and private tutors plus construction workers – are typically the priority focus for HMRC tax enquires as they classed as higher risk for VAT underpayment. Online retailers using platforms like eBay and Amazon are also being targeted.

An HMRC spokesperson said: “We want to get tax right for everyone so that all taxpayers, no matter who they are, pay the right amount of tax at the right time.”

How to avoid a VAT enquiry in your business

Our advice to business owners is twofold:

• VAT can be complicated, so take advice if you need it to ensure you are paying the right amount. Business owners have a responsibility to keep proper records and understand their compliance obligations. If you need specialist advice, take it.
• For a modest annual investment, it is possible to take out tax enquiry insurance cover and protect your business from the impact of professional fees incurred during a tax enquiry. Given that the average cost of a full business enquiry for clients without tax enquiry insurance cover can be in excess of £6,000, it’s a sound investment.

To find out more or get specialist VAT advice, contact partners@rjp.co.uk