PracticeAuditHow can businesses prepare for increased HMRC scrutiny?

How can businesses prepare for increased HMRC scrutiny?

With HMRC increasing its focus on VAT compliance, what can SMEs do to ensure that they have the correct processes in place and are prepared for a future HMRC audit?

How can businesses prepare for increased HMRC scrutiny?

With HMRC increasing its focus on VAT compliance, Adam Bamford, expedite services manager at Software Europe, explores what SMEs can do to ensure that they have the correct processes in place and are prepared for a future HMRC audit.

There is no gentle way of putting it, an impending HMRC audit is a huge upheaval for anyone. Heads of finance are put on the spot and must prove that every expense claimed within the business is legitimate and there are correct receipts and approval processes in place.

It is widely known that HMRC has increased its focus on VAT compliance for large business in recent years. However, over the past couple of years, there has also been a crackdown by HMRC on small and mid-sized businesses (SMEs) which has brought in an additional £468m in tax from investigations in 2015 alone (according to research by UHY Hacker Young).

Whilst compliance teams at HMRC have shifted their focus towards SMEs, many businesses are unprepared for its increasingly close scrutiny.

For SMEs with no robust rules and checks in place, the risk of an HMRC fine is huge and could potentially result in taking them under, with a fine impacting significantly on profitability and challenging the very existence of their business.

Getting VAT reclamation right

There is a great deal of fear amongst SMEs in claiming VAT incorrectly, so many choose to sit on the fence and not claim it at all. It is understandable why many businesses would go down this route. However, by covering the risk of HMRC inspection and not reclaiming any VAT on expenses, in doing so, the business loses significant amounts of money.

I recently dealt with a medium sized company, which was missing out on £70,000 every quarter, through fear of not reclaiming VAT correctly. Three years of not claiming any VAT back cost the company an incredible £840,000.

Dealing with an audit

Historically, HMRC conducted audits for SMEs once every six years, but more recently, this has increased to once every three years.

HMRC is being more proactive with SMEs because if some companies haven’t been checked before and they are more lax in their expenses, there is potential for the HMRC to dish out more fines.

If HMRC finds even just one incorrect expense item with an over claim of VAT and they consider that the item is down to the organisation’s culture, it may decide to multiply it by the amount of expense claims the company has had since its last audit, potentially six years previously.

The best case would be that after an audit, HMRC will ask the majority of SMEs to put more checks and procedures in place to prove that every single expense and their corresponding receipts are being checked by the manager properly rather than not just being approved – something that a business should have been doing anyway.

It can take on average around three months for companies to prepare for an HMRC audit, for which the finance team will need to collate auditable accounts, corresponding receipts, expenses claims and proof of approvals and legitimate expense claims.

In 99.2% of HMRC audit cases, at least one discrepancy will be found, which will not necessarily result in a fine, but is a good indication of the high bar that is necessary for a clean bill from the auditors.

Here are some top tips for ensuring accurate expense claims in businesses and satisfying HMRC requirements.

A clear and enforced policy

Travel expenses aren’t just about paying back claimants whatever they’ve spent. You must have a clear and easy to understand policy in place that is accessible to all your claimants at all times. The policy must state what can and what can’t be claimed and in what circumstances each item on the policy can and can’t be claimed. Don’t forget to detail your mileage reimbursement rules – t’s critical your claimants know this. Lastly, remember you need to tell your claimants what the spending limits are.

An approval process that makes sense

Is your approval process spanning the correct levels of your business? If not, you need to think about who needs to review or simply just have visibility of the expenditure going through expenses. After you’ve decided your approval sign off route you need to audit this on each expense claim.

Correct documentation

How are your claimants evidencing what they’ve spent and why? You need to evidence a business reason for each and every single line of expense item being reimbursed. Receipts, invoices, purchase orders and travel bookings are just a few of the many examples you can show as proof.

Checks and controls

HMRC don’t have any set rules around this point, but do state that checks must be carried out on each claim. Some of the minimum checks I’d recommend are to ensure that VAT information is showing on every VAT applicable receipt you intend to reclaim, each receipt is checked for compliance to your policy, the date of claim is checked (not on weekend etc.), the mileage claims have been checked against a route planner and that the journey was a legitimate business journey.

VAT compliance

Collect those VAT receipts! You must evidence that the VAT being reclaimed was due to a business expense and that it actually occurred.

Secure payment process

Lastly, you must show that your payment process can’t be tampered with. Think about how many human touch points you have – are people open to bribery or fraud, or do you have too many people with access to the export/output?

Final thoughts

HMRC is being more proactive than ever before, so SMEs need to get their house in order for any impending audit. With the recommended processes in place, businesses can confidently reclaim business VAT and ensure that they satisfy any HMRC audit in the future.

 

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