The number of VAT investigations which were undertaken in 2023 was up by 23% as HMRC launched nearly 105,000 enquiries into unpaid VAT, particularly targeting mid-sized businesses.

 

This follows a downturn in investigations during the pandemic. The volume of compliance investigations yielded an extra £11.4bn in unpaid tax, and 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 with the addition of over 3,000 staff since 2021/22 in 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 undertaken looking into large, wealthy and mid-sized companies and individuals as well as small businesses. 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 businesses 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.

The head of corporate tax and trade at Thomson Reuters was quoted to say: ‘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 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 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.

If you need help with your VAT or are unsure as to how to register or complete your VAT returns, please get in touch – our specialist team is here to help.