VAT health checks for large businesses

For large businesses operating in increasingly complex commercial environments, Value Added Tax (VAT) can represent one of the most significant tax risks. VAT is often treated as a routine compliance obligation, but a single process failure can create significant exposure when repeated across multiple transactions. HM Revenue & Customs (HMRC) continues to focus on closing the tax gap and has increased its VAT enforcement activity sharply, with VAT investigations into medium-sized and large businesses rising by nearly a third in the year to March 2025. It is therefore more important than ever to ensure that your VAT returns are filed on time and that your VAT processes, controls and technical positions remain accurate and fit for purpose.

VAT risks for large businesses

As a business grows and becomes more complex, the scope for VAT risk increases. Large businesses often have multiple legal entities, international operations, complex supply chains and high transaction volumes. Responsibility for VAT may also sit across finance, tax, procurement, sales and operations, increasing the risk that issues fall between the cracks.

In many businesses, VAT knowledge rests with a small number of people. If they leave and that knowledge has not been formally documented, the business may face additional risk. A lack of challenge from HMRC does not necessarily mean there are no issues. Some of the largest VAT errors result from a process or treatment repeated for several years before anyone identifies it, including where HMRC has previously visited the business without flagging the issue.

A periodic VAT health check allows you to step back, involve the relevant people and assess whether your VAT accounting, processes and controls remain fit for purpose, or whether you need to investigate any risks further.

HMRC guidance

HMRC is increasingly interested not only in whether an error has occurred, but also in whether your business has appropriate processes to prevent or detect it.

In 2024, HMRC published Guidelines for Compliance 8 (GfC8), which set out its recommended approach to VAT compliance. The detailed guidance explains how businesses should identify VAT risks and ensure that VAT processes and controls are appropriate, documented and tested. It covers the full data lifecycle, from master data through accounts payable (AP) and accounts receivable (AR) to the VAT return. It also gives examples of checks, controls and documentation in specific areas, including those that support Senior Accounting Officer (SAO) sign-off.

GfC8 is intended for UK VAT-registered businesses that use invoice accounting, regardless of size. Businesses should apply it in a way that reflects their size and complexity. If your business makes an error but can demonstrate clear ownership and documented, tested controls, it will generally be in a stronger position to show that it took reasonable care when seeking to mitigate penalties. HMRC may also consider whether a business has followed the guidance when assessing risk ratings as part of a Business Risk Review.

What should a VAT health check cover?

A VAT health check is a structured review of your business’s VAT position, processes and controls. The scope will depend on your business, but a review will typically cover:

• VAT treatment of sales
• Recovery of VAT on costs, including any partial exemption methodology where relevant
• International VAT obligations
• VAT compliance issues
• VAT controls and risk management

You can also target a review at specific areas of concern, such as the VAT treatment of new income streams or the recoverability of VAT on particular costs.

In our experience, VAT health checks often uncover:

• Business changes that have not been considered from a VAT perspective, such as new income streams or international expansion
• Missed income streams, such as internal recharges that have not been considered for VAT purposes
• Failure to apply the reverse charge to overseas costs, which can create a cost for partly exempt businesses
• Input tax recovery errors, including opportunities to maximise recovery and cases of over-recovery
• Failure to retain appropriate evidence for zero-rated exports of goods
• Risks relating to ad hoc income streams, such as property subletting or cost recharges

How business change creates hidden VAT risk

Many VAT issues arise not because controls are poor, but because a business changes faster than its VAT processes. Large organisations constantly evolve: they introduce new products and services, expand overseas, acquire entities and restructure. Each change can bring VAT implications that may not be immediately visible to the finance team.

For example, international expansion may create overseas VAT registration obligations, while new income streams may require a different VAT treatment from existing supplies. We recommend considering VAT whenever your business changes. However, commercial priorities understandably drive the decision, so businesses may not consider the VAT implications at the outset.

A VAT health check helps you take stock of what has changed, identify anything not considered previously and manage the position actively.

The role of technology

Technology plays an increasingly important role in VAT compliance, and many large businesses have invested in enterprise resource planning (ERP) systems, automation and digital transformation programmes. However, technology alone does not remove VAT risk. A VAT coding error in an ERP system can affect thousands of transactions before anyone identifies it. We frequently find that, although VAT logic and coding were correct when a system was implemented, they have not been updated to reflect new products or services, international activities or supply chain changes. Regular reviews can provide assurance that your technology supports VAT compliance while improving efficiency and consistency.

What happens if a VAT health check finds errors?

Finding errors early allows you to correct the position. Prompt action can reduce interest and penalties where your business owes money to HMRC, and maximise claims where it has overpaid or underclaimed VAT.

A VAT health check can identify opportunities as well as risks. Your business may have overpaid or underclaimed VAT, or it may have opportunities to optimise its VAT position in future.

When should a business carry out a VAT health check?

Ideally, VAT health checks should form part of your regular VAT compliance and tax governance programme. Where businesses identify errors, they may need to correct VAT returns covering the previous four years, so a business should ideally carry out a VAT review at least every four years. More frequent reviews may be appropriate following significant changes, such as rapid growth, international expansion, changes to the business model or an ERP system change.

Businesses often identify VAT issues during due diligence when seeking investment or preparing for sale. Regular VAT health checks can reduce the risk of unexpected liabilities affecting valuation, negotiations or transaction timelines.

Consider the following questions. If you cannot answer any of them with confidence, a VAT health check may be worthwhile:

• When did your business last have an independent VAT review?
• Have you considered business changes from a VAT perspective?
• Are your VAT controls documented and tested?
• Is the VAT coding in your ERP system still correct?
• Has your business optimised its VAT recovery?

Managing VAT risk goes beyond avoiding penalties: it can influence pricing, profitability, cash flow and operations. Managed well, VAT can support a competitive advantage; left unchecked, it can create significant financial risk. The most effective organisations treat VAT health checks as a regular part of their tax risk management framework. As scrutiny and business complexity increase, prevention is usually far less costly than remediation.

For businesses within the SAO regime, periodic VAT reviews can also provide assurance that tax accounting arrangements remain appropriate and support annual certification obligations.

If you would like to discuss how a bespoke VAT health check could identify risks and opportunities across your business, please contact our Indirect Tax team or Julie using the form below.