How to prepare for a HMRC inspection
According to the British Chamber of Commerce (BCC) the vast majority of UK businesses believe the cost of complying with the UK tax system has escalated over recent years. A survey by the BCC of over 1,100 firms from across the UK found that three in four (75%) believe the overall burden of tax administration and compliance – the HMRC equivalent of ‘red tape’ – has increased compared to five years ago.
For many organisations a HM Revenue & Customs (HMRC) audit can be 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. Two-thirds (64%) of businesses say that VAT creates the biggest administration and compliance burden, a finding mirrored in the responses of firms of all sizes and sectors.
Adam Marshall, Director General of the British Chambers of Commerce (BCC), said:
“Companies now routinely cite tax administration and compliance, rather than regulation, as their biggest single source of administrative headaches."
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 £3.4bn in tax from investigations in 2016-2017 alone (according to PfP, tax investigation insurance experts).
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 small and medium companies 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 small and medium sized companies 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 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.
Best case, would be 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 and not just being approved – something that a business should’ve been doing anyway.
It can take on average around three months for companies to prepare for a HMRC audit in 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 per cent of HMRC audit cases, at least one discrepancy will be found, which will not necessary result in a fine, but is a good indication of the high bar that is necessary for a clean bill from the auditors.
I’d like to share my top tips for FD’s and CFO’s on ensuring accurate expense claims in your business and satisfying HMRC requirements.
1. A clear and enforced policy
Travel expenses aren't just about paying back your 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, it's critical your claimants know this. Lastly remember you need to tell your claimants what the £ limits are!
2. 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.
3. 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, PO's, travel bookings are just a few of the many examples you can show as proof.
4. 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 is VAT information showing on every VAT applicable receipt you intend to reclaim, each receipt is checked for compliance to your policy, date of claim is checked (not on weekend etc.), that the mileage claims have been checked against a route planner and that the journey was a legitimate business journey.
5. 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.
6. 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/fraud or do you have too many people with access to the export/output?
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.
Sources: British Chambers of Commerce: Cut tax complexity and ‘red tape’ holding back businesses
Further advice on HMRC Expenses Provisioning
Our partner emTax - specialists in employment tax matters provide advice on expenses provision along with a Benefits & Expenses Policy Review & Design. emTax consultants are all ex-HMRC Inspectors and can review your current staff benefits provisioning and expenses policies and procedures, normally as part of a general PAYE Healthcheck. Depending on your requirements, they can then issue a report of our findings including an assessment of potential liabilities uncovered and recommendations for tax savings. This report may then be used to design robust new policies for expenses payments and where necessary, compliant policies on relocation, company car and company van use, engagement of consultants etc.
A free online webinar is being hosted by emTaxt to take you through the steps you should be taking to safegaurd your business and prepare for a HMRC inspection. For more information click here.
Further reading: What happens during a HMRC PAYE & NIC inspection?