Spotlight on VAT Compliance

HMRC is stepping up its VAT compliance activity in 2025, with a notable rise in both remote (desktop) and in-person inspections. As Making Tax Digital (MTD) becomes fully embedded, HMRC is using new data flows and its enhanced digital tools to identify irregularities earlier and more aggressively.

• MTD non-compliance now frequently triggers reviews, especially where digital links or software integrations are missing.
• Desktop reviews are now standard, allowing HMRC to carry out checks without visiting premises.
• Guidelines for Compliance 8 (GfC8), issued in September 2024, sets expectations for internal VAT controls, record-keeping, and governance.

HMRC’s Expanding Powers

To support this, HMRC has increased funding and staffing for its Customer Compliance Group and Fraud Investigation Service (FIS). Investigators have powers to:

• Search premises, seize records, and make arrests.
• Use the Proceeds of Crime Act to recover tax-linked assets.

What’s at Stake: VAT Penalties in 2025

New Penalty System for Late Filing & Payment

Effective from January 2023:

• Points-based penalties: £200 fine once you hit 4 points (quarterly filers), with further £200 for each late return.
• Late payment fines:
  • 16–30 days late = 2% of unpaid VAT
  • 31+ days late = 4% + daily interest at 4% p.a.

Spring 2025 Update: Even Tougher Penalties

The March 2025 Spring Budget introduced:

• Higher MTD penalties: 3% at 15 days late, an additional 3% at 30 days, plus 10% annually beyond 31 days.
• More enforcement: HMRC will work with private debt collectors and aims to raise £1 billion from enhanced collection.

VAT Fraud & ‘Knowledge Principle’

Businesses can face 30% fixed penalties if they knew or should have known that their transactions were linked to VAT fraud. HMRC may:

• Disallow input VAT
• Name and shame businesses or directors if VAT at stake exceeds £50,000.

Information Requests: Non-Compliance Costs

Failure to respond to HMRC information notices without valid excuse may result in a £300 fine per notice.

Stay Compliant

Issue	Action
MTD Compliance	Ensure full digital links and software compatibility
Filing/Payment Timeliness	File VAT returns and pay on time to avoid penalty points
Internal Controls	Follow GfC8 guidelines to reduce audit risk
Suspicious Transactions	Avoid high-risk suppliers; conduct due diligence
HMRC Requests	Respond fully and on time to info requests

Conclusion

VAT compliance in 2025 is under sharp focus. With increased funding, strengthened powers, and a new penalty regime, HMRC is clearly prioritising VAT as a key area for enforcement and revenue recovery.

How CloudAcc Can Help

Need help with VAT checks. We are here to assist. You can get in touch with us to schedule a review or consultation.