Yield from "more aggressive" HMRC VAT investigations trebles in a year

HMRC's Large Business Service (LBS) department collected £1,340 million in tax year 2010-11 as a result of its investigations, up from £443m the year before. The number of new investigations opened against businesses increased by 42% in the same period, according to the figures.

The LBS works with 782 of the UK's largest businesses on a range of taxes, duties and regimes.

Tax expert Steven Porter of Pinsent Masons pointed out that the increased number of investigations coincided with the increase in VAT to 20% from January 2011 alongside HMRC's "much tougher approach" to compliance issues. The tax had the potential, he said, to become an "important battleground" between HMRC and businesses over the next couple of years.

"With VAT at 20% so soon after being only 15%, the impact of VAT as a cost to business is more noticeable than ever before," he said. "With their eye on the bottom line, businesses will have been looking for ways to limit their VAT liabilities as much as possible. HMRC has responded aggressively. Both sides are under pressure: businesses to maintain profits, HMRC to increase its revenue."

HMRC said that a one-off investigation aimed at the leisure and gaming industry, which brought in £500m, had distorted the figures. However, even without this sum its 2010-11 investigations yielded the highest amount in repayments over the past five years. In addition new investigations were opened into 262 businesses covered by the LBS compared to the previous year - a figure which, Porter said, did not take into account the fact that businesses may be subject to more than one enquiry at a time.

"The jump in enquiries and yield this year has been huge – we've not seen one like it in the past couple of years," he said. "It's been a busy year from HMRC: more new investigations and bigger results from ongoing investigations too. It definitely fits the pattern we've seen since 2010 of a tougher, more aggressive HMRC and shows that HMRC is keener than ever to crack down on businesses."

The Government has recently announced a variety of measures aimed at cracking down on tax avoidance. Last week HMRC published a consultation on changes to the Disclosure of Tax Avoidance Schemes (DOTAS) rules that would make it easier for the department to find out about taxpayers who were using avoidance schemes to artificially reduce their tax liability, while the Treasury is currently consulting on a 'general anti-abuse rule' to apply to the main direct taxes and national insurance.

However, Porter warned that HMRC's tougher stance had not always resulted in more efficient investigations.

"There isn't always a case to answer when HMRC opens an enquiry," he said. "This wouldn't be so much of a problem if the VAT enquiry process was more efficient; but as HMRC themselves admit, VAT enquiries can take well over a year to conclude. The cloud of a VAT enquiry can make it very difficult for businesses to plan ahead effectively, especially if there is more than one enquiry into that business taking place."

HMRC needed to recognise the impact of its investigations on businesses and speed up the process he said, particularly in those cases where large payments ultimately had to be made.