Bulging VAT gap will lead to rise in tax investigations of retail clients

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Accountancy firms should be prepared for HMRC to ramp up significantly its efforts to close the VAT gap, following the release of new figures that show that the UK’s VAT gap has grown by 25% in the year to April.

The VAT gap – the difference between the amount of value added tax HM Revenue & Customs receives and the amount it believes it should be paid – jumped from £10.3 billion to £12.9 billion in the last year.

As a consequence, we expect HMRC to track down the missing VAT by increasing tax investigations of clients operating in cash-culture sectors that are heavily populated by sole traders and SMEs.

Some SMEs have already been under HMRC’s spotlight for participation in VAT avoidance schemes, such as a scheme involving car repairs done under warranty which was defeated at the Supreme Court earlier this year, or the exploitation of Low Value Consignation Relief by online retailers to distribute goods into the UK without incurring VAT.

Accountancy firms are best advised to be proactive and make sure that clients have their VAT affairs in order before HMRC knocks on the door.

Even where there has been no intention of avoiding a VAT bill, retailers and sole traders could well be subjected to an investigation as HMRC aims to step up the level of VAT-related investigation activity.

One scenario that might trigger an investigation is when a small business registers for VAT because a large new contract has taken it over the VAT threshold for the first time.  HMRC may be concerned about any large jump in turnover and run checks on previous years’ activity.

HMRC has also been adding to its VAT investigations toolkit. It can now monitor a business’s chip and pin sales directly from the payment services provider without the business even knowing. This makes it easier for HMRC to check for discrepancies between a business’s sales receipts and its declared income.

The growth in the VAT gap is an early warning for retail clients to consider tax investigations insurance. HMRC has signalled that it thinks there is a lot more VAT going unpaid, and that means retailers and tradesmen may find the tax man knocking on their door.

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