Rising VAT Penalties Amid Complexity and HMRC Compliance Drive
Xeinadin, a leading professional services group in the UK and Ireland, warns that businesses face an elevated risk of financial penalties due to VAT errors. The complexity of the VAT regime and HMRC’s renewed focus on compliance have contributed to a 66% increase in penalties issued for VAT inaccuracies in the tax year 2021-22 compared to the previous year. With over 66,000 penalties issued, totaling over £159 million, businesses need effective strategies to manage VAT risks and avoid substantial financial consequences.
Xeinadin Introduces a Unique VAT Risk Assessment Tool
To assist businesses in protecting themselves and managing VAT risk, Xeinadin has launched an innovative VAT risk evaluation tool. This behavior-based assessment tool is the first of its kind in the market. By assessing a company’s attitude toward VAT risk and the processes it has implemented for compliance, the tool provides robust evidence that demonstrates reasonable care to HMRC.
The Impact of Increasing Complexity
The management of VAT compliance by HMRC has evolved over the years. Brexit has further complicated the UK tax regime, affecting cross-border relationships and granting the country the ability to modify VAT in ways it couldn’t before. Additionally, VAT risk is exacerbated during challenging economic times when businesses diversify into various lines of business. This complexity poses challenges for businesses, particularly those without dedicated tax departments, leading to a higher risk of late payments and errors.
The Functionality of the VAT Risk Assessment Tool
Xeinadin’s VAT risk assessment tool evaluates a company’s risk attitude towards VAT by assessing the thought and processes put into ensuring compliance within the organization. The tool assigns a risk rating to each response, generating a total risk score and offering tailored recommendations from Xeinadin’s VAT experts. It enables companies to demonstrate to HMRC that they have taken reasonable care to ensure accurate tax declarations and have implemented appropriate training and checking processes for VAT data production.
Mitigating Penalties with Reasonable Care
As penalties are behavior-based, businesses can mitigate them by demonstrating that they have exercised reasonable care in declaring the correct tax at the right time. This includes establishing training programs for staff and implementing sound checking procedures for VAT data submission. Xeinadin’s VAT risk assessment tool helps businesses identify their risk levels and provides a roadmap for immediate and long-term actions, such as recruiting expertise or adopting new systems and processes.
The Importance of VAT Risk Mitigation
Liz Maher, Indirect Tax Director at Xeinadin Group, emphasizes the escalating threat of VAT risk to businesses and the not-for-profit sector. VAT errors, often unexpected, can lead to organizational failures. Unlike annual audits, VAT processes and controls are not covered, making them an overlooked risk area. The VAT risk assessment tool fills this gap, providing a value-added service that significantly mitigates the risk of financial penalties and contributes to good governance.
Expanding Applications and Future Potential
Xeinadin Group is considering alternative applications for the VAT risk assessment tool, such as incorporating it into the due diligence process for acquisitions. With VAT management being a potentially serious risk area, evaluating a company’s attitude towards VAT becomes a crucial exercise. By offering expertise in this area, Xeinadin aims to support organizations that lack the necessary knowledge and expertise to navigate VAT complexities effectively.
As businesses continue to face mounting VAT risks, Xeinadin’s VAT risk assessment tool serves as an essential tool for businesses to safeguard themselves and demonstrate compliance with reasonable care. By proactively managing VAT risks, businesses can minimize penalties, protect their financial stability, and ensure good governance in their operations.
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