Understanding VAT compliance controls

Managing tax compliance, particularly for Value Added Tax (VAT), can be daunting for business owners.

HMRC’s VAT guide (VAT Notice 700) covers all the main VAT rules and procedures, along with other helpful information and links to help with VAT on GOV.UK.

Getting VAT compliance right is vital for avoiding penalties and keeping your business running smoothly, so it’s worth taking time to fully understand the requirements.

VAT compliance controls are fundamental to the accurate filing and reporting of VAT.

They allow HMRC to categorise and track transactions, which helps businesses maintain transparency and accuracy in their financial dealings.

However, many business owners find themselves overwhelmed by the complexity and specificity of these controls.

HMRC has released its ‘Guidelines for Compliance – Assistance with VAT Compliance Controls’.

These guidelines share HMRC’s recommended approach and provide practical advice for companies seeking to avoid non-compliance.

Find HMRC’s guidance: Help with VAT compliance controls – Guidelines for Compliance GfC8.

Read on for tips on mastering VAT compliance controls and maintaining robust VAT processes.

Common VAT compliance errors

Businesses can make various types of mistakes when accounting for VAT, including:

• incorrect VAT calculations
• missed deadlines
• inaccurate record-keeping
• incorrectly claiming input VAT (on non-business expenses or invalid invoices)
• not using MTD-compliant software
• failing to report irregular transactions or supplies outside normal activities.

If you’re using invoice accounting, where VAT is recorded when invoices are issued and received, having the right systems and processes (controls) in place can help with compliance.

Using best practices could also help you save time and energy, which you could use to grow your business.

How can you help to ensure VAT compliance?

Accurately accounting for VAT on your sales and purchases, filing your returns on time, and keeping your records in order can all help you stay compliant.

Having efficient controls in place to help you stay on top of these tasks can be crucial – they’re like your business’s safety net, making sure everything is reported accurately.

This can reduce the chances of costly mistakes, as failing to meet obligations can result in penalties.

These can include financial fines and interest charges, which could impact your business’s financial health and reputation.

So, regular reviews and accurate reporting can help you avoid these pitfalls.

How to create a strong tax control framework

Start by reviewing your current VAT processes and identifying areas for improvement.

Do you have efficient systems in place?

Building a solid tax control framework could be key.

This can help you spot potential risks and set up controls to manage them.

Remember to record any risks, evaluate your controls, and be ready to adapt if regulations change.

To future-proof your framework, stay updated on HMRC guidelines and legislative changes so that you can prepare for any new compliance requirements.

Also, consider choosing software that easily incorporates changes in VAT rules.

Working smarter with software

Using Making Tax Digital (MTD) compliant software can be a game-changer for your business – it automates record-keeping and submissions, cutting down on errors.

Read more about Maxing Tax Digital and how it can help you.

You can look for the right choice for your business with the help of HMRC’s digital software directory.

Examples of MTD-compliant software include Xero and Quickbooks.

Good practices for VAT compliance – what to consider

It’s important to have a good understanding of the government’s guidelines for VAT compliance.

Look into the following key areas to help streamline your operations.

1. Risk management and processes

Spotting risks and managing them is crucial for staying compliant.

Designing controls that fit your business, size, and complexity can help reduce the chance of mistakes.

For example, you might include automated systems for VAT calculations, checks for invoice accuracy, or transaction approval processes.

Try these tips:

• regularly identify and document risks – keep assessing potential VAT risks and maintain a structured risk register to track them. This document lists and tracks potential VAT-related risks your business might face and the processes you have to tackle them.
• avoid sampling – use effective, monitored automation to perform a 100% check as this provides more assurance than sampling
• design controls that work for you – develop suitable measures for your particular business
• review your processes regularly – make sure your systems stay relevant and adjust them if necessary.

2. IT infrastructure, AI, and data management

Technology can play a big role in supporting VAT compliance – use it wisely and you could transform the way you work.

Make sure your systems are well documented, and your data stays accurate for reporting.

Try these tips:

• document your systems – keep detailed records of IT systems, such as software for VAT calculations or cloud storage solutions for document management, and schedule regular backups to prevent data loss
• ensure data accuracy – maintain up-to-date and accurate data for VAT reporting by using tools that check entries for consistency
• try tech tools – you could use IT and AI tools to enhance compliance processes. For example, AI analytics tools such as Microsoft Power BI (used in conjunction with MTD-compatible software) can analyse data and help you spot errors.

Read about tech solutions to lower costs and help your business grow.

3. Your sales journey

Think about how you manage sales from the moment an order is placed to the moment you receive payment.

Getting VAT right at every step (for example, when you’re sending out invoices or receiving payments) keeps things in order.

Try these tips:

• calculate accurately – check that VAT is calculated at each stage to avoid discrepancies
• implement credit limits – think about using credit limits to manage your financial risk and maintain cash flow
• ensure accurate order processing – make sure orders are processed correctly to prevent any mistakes.

4. Your supply chain/Procure to pay (P2P)

Are you on top of your supply chain’s journey, from ordering supplies to paying the bills?

Keeping track of every transaction and input tax claim is key.

With a bit of organisation, you can keep everything running smoothly.

Try these tips:

• approve purchase orders – make sure all orders are approved to control spending
• keep transaction records accurate – well-kept records will help you stay on top of your finances
• check goods received – match what you have ordered with what you have got to ensure accuracy.

5. Financial reporting

Gathering and presenting your financial information effectively for reporting is key.

Accurate VAT reporting is a big part of this, so make sure your accounting systems are set up correctly.

Try these tips:

• update your general ledger regularly – keep your financial records current for accurate reporting
• prepare accurate financial statements – ensure your statements align with VAT requirements
• conduct regular reviews – perform checks to maintain data integrity.

6. VAT reporting

Staying compliant with Making Tax Digital (MTD) regulations is important for accurate reporting.

Complete and accurate VAT reports are necessary for compliance, so keep digital records and submit your returns correctly.

Try these tips:

• ensure MTD compliance – think about using digital systems for record-keeping and submissions
• double-check your reports – make sure reports are complete and error-free
• simplify your life with tech – leverage technology to streamline your processes and make VAT reporting easier.

7. Manual adjustments

Sometimes, you’ll need to make tweaks to fix errors or meet regulatory requirements.

Make sure these adjustments are recorded accurately and you’ve have the calculations to back them up.

Try these tips:

• document changes – keep track of every adjustment with supporting calculations
• follow the rules – ensure adjustments comply with legal requirements
• keep an audit trail – detailed records are invaluable for audits.

8. Outsourcing

If you’re handing over your VAT processes to a third party, such as an accountant or tax consultant, make sure they follow the rules.

Check you have clear contracts and consider regular reviews to keep things under control.

Try these tips:

• check your third-party compliance – ensure that your providers meet compliance standards to avoid any problems down the line
• set clear expectations – outline responsibilities and expectations clearly
• regularly monitor performance – conduct check-ins to ensure ongoing compliance.

Read our guidance about hiring a qualified accountant.

9. Employee expenses

When managing employee expenses, you need to capture and reimburse costs correctly for VAT.

Make sure you’re only reimbursing valid expenses and that your input tax claims are spot-on.

Try these tips:

• only reimburse valid expenses – make sure any costs meet VAT criteria before you approve them
• check the tax claims – verify that all claims are correct and keep documentation
• use controls for expenses – make checks to manage employee expenses effectively.

Correcting errors in your VAT return

If you have made a mistake in your VAT return, don’t worry.

Correcting it can be straightforward.

If your correction meets specific conditions, you may not even have to inform HM Revenue and Customs (HMRC).

You can just fix it by adjusting your next VAT return.

Start by following the VAT Notice 700/45 steps to do this.

Ignoring errors could lead to penalties or interest, but staying proactive can help you keep your VAT records accurate and your business healthy.

If you need help, you might consider seeking professional advice tailored to your needs.

An accountant or tax consultant specialising in VAT compliance can give you bespoke support.

For more detailed guidance, read HMRC’s Help with VAT compliance controls – Guidelines for Compliance GfC8.

Read our definitive guide to VAT.