UK’s VAT guidance highlights urgent need for tech adoption

About two weeks ago, the department released new Guidelines for Compliance (GfC), known as ‘GfC8’.

These guidelines present His Majesty’s Revenue & Customs (HMRC) insights on complex and novel risks across tax regimes, including employer guidelines, corporation tax and VAT. They aim to: 

1. Clarify HMRC’s compliance expectations to help taxpayers avoid non-compliance. 
2. Identify approaches that may lead to inaccuracies, interest and penalties. 
3. Provide insights into practical law applications and HMRC’s administrative approaches, extending the scope of its material. 

The department is also adapting to the increasingly digital nature of commerce, recognising that technology deployment for end-to-end process automation is essential. By embedding robust control frameworks, HMRC seeks to enhance compliance and efficiency in a rapidly evolving digital economy. 

The report consists of ten sections tailored to tax, finance, accounting and IT groups, providing comprehensive guidance. It outlines the purpose and audience, gives an overview of VAT compliance controls and delves into VAT-related compliance in processes like order-to-cash, procure-to-pay, employee expenses, record-to-report, VAT reporting and outsourcing. The conclusion briefly addresses correcting VAT errors. 

For indirect tax groups, a practical approach to GfC8 is to start with the second section (general VAT compliance controls) and then review sections six (record to report) and seven (VAT reporting). These sections focus on HMRC’s compliance expectations, identifying VAT-related risks, control design, roles, responsibilities and documentation requirements. 

This guidance will prompt tax, IT and finance groups to evaluate their existing tax automation solutions and integration quality with ERP systems, procurement solutions, e-commerce platforms and other accounting applications. HMRC stresses the need for seamless integrations, accurate mapping of tax codes to general ledger VAT accounts and staying ahead of changing tax rates and rules. 

Sections three (order-to-cash) and four (procure-to-pay) are also important to review. The order-to-cash section outlines control points for accurate VAT calculations, reporting and documentation related to sales orders, dispatch, invoicing and payment receipt. It highlights common VAT compliance risks, such as manual tax code changes. The procure-to-pay section offers guidelines for purchase orders, supplier payments and procurement-related VAT compliance risks. 

By detailing its VAT compliance expectations, HMRC demonstrates its commitment to strengthening VAT compliance in the UK. This initiative is critical as the VAT gap – the difference between expected VAT and collected VAT – remains concerning, with a preliminary estimate for 2022–2023 showing a gap of 5.3%, approximately £8.8 billion. 

Moreover, HMRC plans to launch a consultation on e-invoicing to promote its adoption across UK businesses and government departments. This initiative marks a significant step in the UK’s digital transformation, particularly in the B2B space. While the UK has implemented Making Tax Digital (MTD) for VAT, it still lags behind other countries in this area. Widespread e-invoicing adoption should be a public policy focus to drive digitalisation, benefiting both businesses and the government. The introduction of e-invoicing presents complex challenges for governments and businesses adapting to new regulations but aligns with the digital world’s evolution.

Anticipation is high for more details to emerge from the UK’s consultation, which will gather business input on how HMRC can support and encourage e-invoicing uptake. Vertex has been assisting businesses in preparing for significant changes, as various EU countries implement or plan e-invoicing and real-time reporting requirements, offering valuable lessons from their experiences. We encourage you to also stay informed and actively participate in the upcoming consultation as your input could shape the future of e-invoicing in the UK. 

It is encouraging to see tax authorities finally recognise what many of us have been advocating for years: that the future lies in technology-driven solutions for end-to-end process automation. The recent announcements by HMRC are a clear indicator that they are beginning to appreciate the immense value of integrating control frameworks throughout these processes. 

For too long, compliance has been hampered by manual tasks and fragmented systems, leading to inefficiencies and risks of errors. However, with the push towards more robust technological deployment, particularly in areas like e-invoicing and automated reporting, there’s an opportunity to drastically enhance accuracy, compliance and operational efficiency. By embedding technology at the heart of tax processes, businesses and tax authorities alike can benefit from seamless integrations, reduced VAT gaps and streamlined compliance. 

This is a significant step forward for the UK’s tax landscape, signaling that the country is catching up with the digital progress made by its global counterparts. For businesses, it’s an important reminder to assess and upgrade their current tax automation and control systems to stay ahead of these changes. The digital era of tax compliance is no longer a distant future; it’s happening now, and those who prepare today will thrive in tomorrow’s environment.