A recent case reported by the BBC and other news outlets involved two Glasgow restaurateurs who fraudulently evaded nearly £700,000 of VAT across a group of restaurant businesses, including well-known venues. By deliberately suppressing sales and under-declaring income, they were able to retain VAT that should have been paid to HMRC, ultimately funding wages and increasing their personal income. Both individuals were sentenced to three years in prison. Their accountant, who prepared and submitted VAT returns for the businesses, admitted to recklessly submitting incorrect figures which significantly under-declared VAT. Although he did not personally benefit and avoided a custodial sentence, he was still sanctioned by the court and ordered to carry out unpaid work, with the judge emphasising that as a professional he should have exercised greater care.
This case highlights that neither business owners nor accountants escape consequences where VAT is incorrect, even where reliance is placed on information provided. In practice, most VAT issues arise in fairly predictable ways. Common reasons include:
- Late registration. Once a business exceeds the £90,000 threshold, or expects to do so in the near future, it must register promptly. Missing this point can lead to VAT being owed on past sales, often creating a large and unexpected tax bill.
- Incorrect VAT treatment; particularly where businesses offer a mix of products or services. The distinction between standard-rated, zero-rated and exempt supplies is not always straightforward, and errors can persist for years before being identified, at which point the cost of correction can be significant.
- Over-reliance on assumptions. Many business owners understandably assume that providing information to their accountant is enough, but VAT is not simply an administrative exercise. Both businesses and their advisers are expected to ensure that the figures being submitted are reasonable and that the underlying treatment is correct. Where information is incomplete or inaccurate, even unintentionally, it can still result in compliance failures.
What this means in practice is that VAT needs to be actively managed for and with clients rather than just reported. Ensure your client:
- Keeps accurate and complete records.
- Regularly review turnover to ensure registration thresholds are not breached.
- Report any new activities or changes in how the business operates to you – this should be your flag to suggest a prompt review of VAT treatment to ensure it remains appropriate.
For more straightforward businesses, periodic sense checks are usually sufficient to keep things on track. However, for businesses that are growing, more complex, or operating across different income streams, a more structured approach is advisable. VAT errors rarely arise from a single moment; they tend to build gradually over time. The positive point is that most issues are preventable with the right level of oversight and review. Generally, a full VAT review every three years helps ensure that treatment remains correct; risks are identified early, and opportunities are not missed. If you have any clients that haven't had a review in a while, let us take a look.
How a review of any client can help – a short case study
We have recently undertaken a one-hour review for a new audit client, which has turned out to be time well spent. The client was initially confident that their VAT position was correct and their only query was in relation to a methodology they had been applying for at least the last 10 years.
On further review, it was identified that they may be applying a special methodology without HMRC approval (a potential £580k exposure) from using a sample review from 10 years ago which has never been updated. In addition, there appeared to be some flaws with both the business/non-business calculation (a potential £10k exposure) and partial exemption calculation (a potential £21k exposure) due to incorrect allocation of costs.
Whilst there is never a good time to identify issues such as those above, on the basis this was a new audit client the conversation will not involve the classic “why didn’t you spot this last year?” question from the client.
