The number of VAT investigations was up 23% last year as HMRC launched 104,900 probes into unpaid VAT, particularly targeted at mid-sized businesses
This follows a downturn in investigation activity during the pandemic. The volume of compliance probes yielded an extra £11.4bn in unpaid tax, showed figures from Thomson Reuters, while the number of active cases was up from 88,700 in 2022.
The increase in HMRC investigations forms part of the department’s efforts to maximise tax revenues by adding resources to its specialist tax investigation teams.
HMRC has stepped up its compliance drive recently, including the addition of over 3,000 staff since 2021/22 to its customer compliance units. This has led to HMRC being able to open and investigate more potential cases of unpaid VAT.
The extra VAT collected through investigations includes compliance work from the large, wealthy and mid-sized and individuals & small businesses directorates within HMRC. According to HMRC, the estimated tax gap for VAT – the amount of unpaid taxes after its tax investigations – was £8.8bn in the 2022-23 tax year, up from £7.6bn in 2021-22.
The wealthy and mid-sized business directorate saw the biggest increase in investigations opened, increasing 60% from 3,253 to 5,203. Cases opened into individuals & small businesses increased 22% while cases into large businesses increased 17%.
The biggest increase in recovered revenue from VAT compliance investigations came from large businesses, which yielded an additional £5bn last year.
VAT receipts account for approximately 20% of HMRC’s total tax receipts. This makes it one of the biggest sources of revenue alongside income tax and national insurance contributions.
Ray Grove, head of corporate tax and trade at Thomson Reuters said: ‘VAT is a very complex tax to get right as it has varying rates and liabilities across different tax jurisdictions. 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.’
Businesses are facing increased scrutiny from tax authorities around the world who are looking for possible VAT underpayments. More than 80 national governments now mandate the use of e-invoicing or continuous transaction control requirements for VAT and other sales taxes, which allows tax authorities to spot any underpayments of tax more easily.
UK businesses trading in the EU will have to comply with plans to implement e-invoicing rules from 2024 as part of a crackdown on the underpayment of VAT by businesses. This will require all businesses falling under the regulation to issue, deliver and receive electronic invoices.