David Reaney and Emma Robinson explore HMRC’s publication, ‘Help with VAT compliance controls—Guidelines for Compliance GfC8’ and consider the implications for businesses. GfC8 was published in September 2024, but its profile has fallen well short of what would be expected for a publication of this level of detail and potential significance.
On 25 September 2024 HMRC published ‘Help with VAT compliance controls—Guidelines for Compliance GfC8’. This publication has 10 parts and, if printed, would exceed 40 pages in length. On the landing page for the publication, HMRC states:
“These Guidelines for Compliance (GfC) set out HMRC’s recommended approach and are designed to help you understand our expectations as you plan, carry out, and review the accounting and compliance processes that ensure VAT is accurately declared by your business.”
In this article we have summarised, at a high level, the content within the publication. This summary is not intended to provide knowledge of the detail but rather act as a series of prompts to spark the reader’s interest in exploring it further.
We expect that many of these concepts should be familiar to larger businesses but perhaps less so for small or medium sized ones.
In our experience the existence of this guidance is not widely known and with HMRC’s clear statement around expectations, especially in an environment of increased audit activity, it is important for businesses to ensure they have considered the application of this guidance to their business.
1. Overview—Key Takeaways
In our view, the best way to understand and digest the content is to start with two key messages which are threads running through the content.
- HMRC expect businesses to have written processes and procedures for their VAT compliance.
- HMRC expects VAT to be included in an overall tax control framework which should include risks identified, controls to address the risks, an identified owner of the risks and processes to monitor the risks and the response on an ongoing basis.
In our experience many businesses still do not have detailed written procedures for VAT compliance and a range of different approaches to tax control frameworks is applied. Given HMRC’s assumption that the ‘digital journey’ under Making Tax Digital for VAT is able to be evidenced, e.g. by flow diagram, we expect almost all businesses will have work to do to meet the HMRC expectations as outlined in GfC8.
2. Summary of Guidelines for Compliance GfC8
The guidelines encompass a range of topics designed to cover the tax compliance process and are set out into 10 different parts. The best way to understand how these fit together is to split them into (i) topics focused on the end-to-end VAT compliance process and (ii) topics which have been identified as specific risks within that process.
A. End-to-end process
1. Purpose, scope and audience
The guidelines are for UK VAT registered businesses who use invoice accounting, meaning they account for VAT when invoices are issued and received (essentially this will be all VAT registered businesses aside from those operating special schemes, e.g. cash accounting). They provide the taxpayer with HMRC’s recommended approach and are designed to help the taxpayer as it carries out and reviews the accounting and compliance processes to ensure VAT is accurately declared.
2. General approach to VAT compliance controls
This section provides information on good practices to help manage VAT accounting and compliance processes which includes (but is not limited to):
- Risk management;
- Control design considerations; and
- Documentation for internal controls.
3. Order-to-cash
The overall control objective of Order-to-Cash (‘O2C’) is the timely, complete and accurate recording of transaction and payments. O2C represents the typical set of business functions used to manage Business to Business customer orders from sales order, fulfilment, billing, customer payments and recording transactions in financial accounts.
4. Procure-to Pay
The overall control objective of Procure-to-Pay (‘P2P’) is the timely, complete and accurate recording of transactions and payments received. P2P represents the typical set of business functions used to manage Business to Business purchasing processes and include purchase orders, receipt of supply, tax invoice being received, credit notes and discount adjustments and supplier payments.
5. Record to report
Record to report (‘R2R’) is an accounting process which involves collecting, processing and presenting information to provide strategic, financial and operational analysis. It also covers the steps involved in preparing and reporting the overall accounts. R2R covers both external and internal reporting and generally, the R2R function is not engaged in processing transactions but instead focuses on the aggregation of existing data to meet reporting requirements.
B. Specific risk areas identified
6. Employee expenses
Often viewed as a high-risk area by HMRC, expenses processes exist for capturing, authorising and paying various kinds of reimbursed business costs to employees. HMRC has set out guidance for various control points on employee expenses relating to the system configuration, the expense process, business entertainment and auditing the expense claims.
7. VAT reporting
Relevant for business who adopt invoice accounting, it includes detail on VAT reporting control objectives for the following categories (note this list is not exhaustive):
- Organisational unit structure,
- General ledger posting,
- Making Tax Digital for VAT regulations,
- VAT reports,
- Consolidation of return figures, and
- Manual adjustments.
8. VAT reporting—manual adjustments
Manual adjustments to VAT reporting can occur for different reasons including consolidation of totals from separate business functions or systems. HMRC have included detail on control objectives for common types of adjustments including adjustments for errors and corrections, how to deal with one-off or irregular supplies such as disposal of assets, adjustments under the capital goods scheme or partial exemption restrictions and bad debt adjustments.
9. Outsourcing
Businesses processes such as IT services, legal services, financial and accounting services can be outsourced as well as the businesses VAT compliance function. Even where the business chooses to outsource some functions this does not outsource the risk, and legal responsibility remains with the commissioning organisation.
10. Next steps
It is expected that businesses may recognise new elements of good practice and it is HMRC’s view that implementing the guidelines can lead to improvements in systems and processes.
Businesses are encouraged to take proactive steps to ensure compliance which might include:
- Reviewing and updating record-keeping practices;
- Implementing internal compliance audits;
- Developing a compliance strategy;
- Engaging with HMRC; and
- Stay informed about penalties.
3. Conclusion
Despite its low profile to date, this guidance marks a key development in the UK's tax compliance landscape. By outlining clear expectations and emphasising the importance of transparency, accountability, and communication, these guidelines aim to foster a more compliant and efficient business environment.
Businesses should take proactive steps to align with these guidelines, ensuring that they are well-prepared. With careful planning, businesses can navigate the new compliance framework successfully and avoid potential penalties for non-compliance.
Referring back to the two key messages outlined above, we would encourage businesses to review internal written processes on controls and the overall tax control framework to ensure that these would at least meet, if not exceed, HMRC’s expectations.
Perhaps the best way to assess your current position is to consider how you would demonstrate that you meet HMRC’s expectations should you be asked to do so in a VAT visit in the near future.
Finally, we would encourage particular attention is paid to the specific areas of risk such as employee expenses.
If you have queries about any specific section, please contact us.
David Reaney FCA, CTA, is Indirect Tax Partner at KPMG
Emma Robinson CTA, Indirect Tax Associate Director at KPMG
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