HMRC ups scrutiny of unpaid VAT by midsized businesses and the wealthy

Stay informed with free updates

Simply sign up to the UK tax myFT Digest — delivered directly to your inbox.

The UK tax authority increased its scrutiny of value added tax avoidance in 2022-23, opening 23 per cent more cases than the previous year, new data has shown.

HM Revenue & Customs opened 109,413 VAT cases in the 12 months to 31 March 2023, compared to the 88,673 in the year before, a freedom of information request has revealed.

Tax experts said the increased scrutiny was part of the department’s efforts to maximise tax revenues.

“VAT is a very complex tax to get right,” said Ray Grove, head of corporate tax and trade at Thomson Reuters, a content and technology company.

“This complexity can open the door for mistakes to be made — which is why HMRC . . . and so many other tax authorities are investing so much of their compliance work into this area.”

Interventions undertaken by the tax office included making inquiries into the financial affairs of both individuals and businesses, as well as visiting their premises.

HMRC’s enforcement work on VAT is done through three different teams, known as directorates, which focus on large businesses; midsized businesses and wealthy individuals; and small businesses and other individuals.

The FOI response showed that in the past year HMRC focused primarily on wealthy individuals and midsized businesses, with the number of interventions targeting this group increasing by 60 per cent from 3,253 cases in 2021-22 to 5,203 in 2022-23.

The shift in resourcing showed HMRC was “increasingly focusing on those taxpayers that are most likely to be responsible for collecting large values of VAT, and thus are prone to high-value VAT accounting errors”, said Phil Munn, a VAT partner at RSM UK, an accountancy firm.

He added that there had been a big increase in the number of physical visits made by HMRC to his clients in the past year. While he acknowledged these may partly have been due to the tax authority “catching up” on in-person visits in the wake of the pandemic, it was also a sign that it wanted to ensure the correct amount of tax was being paid.

“They’re very concerned about errors and avoidance and evasion,” Munn added. “Making tax digital and Brexit created significant changes in the VAT system and they haven’t really had an opportunity to test the effect that has had on the taxpayer community.”

The VAT “tax gap” — the difference between the amount of tax that HMRC estimates it should collect and what is actually paid — was estimated by the agency to be £7.6bn in the 2021-2022 tax year.

HMRC said in the FOI response that the VAT gap had been on a downward trend, dropping from 14 per cent in 2005-06 to 5.4 per cent in 2021-22.

“We have introduced legislation and enhanced requirements for online reporting and registration which are helping to reduce error, avoidance and evasion,” it added.

“We continue to work with customers, agents, trade and representative bodies to provide tax education and guidance, resulting in preventive measures which ensure tax is correctly accounted for without the need for further intervention.”