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Are you putting yourself at risk of a VAT surprise?

Growth to mid sized companies have a heightened tax risk due to the pace of change

Tax is one of those areas where being small, dynamic and exciting can be really dangerous.

As you try to juggle your business requirements with your limited cash resources, it can be much easier to allocate funds to areas that you understand or promote growth and overlook complexities that could really harm your current and future profitability.

Tax is definitely one of those areas.

Few accountants, finance directors, legal advisers or field auditors have any significant knowledge on direct and indirect taxes, which can leave management and Boards unwittingly exposed.

Even when some external tax advice is sought by Finance Teams, it is often not enough to consider that advice as a full and final resolution of the uncertainty, because:

  • the tax uncertainty may not have been fully and effectively communicated to those advisers, due to inherent communication and interpretation risks combined with cost pressures

  • the operational practices within the company may change quickly as it grows and make the original advice invalid, or

  • the legislation, case law and guidance may become outdated

If companies don't control and monitor tax risk across the whole direct and indirect tax framework effectively on an ongoing proactive basis, the repercussions could cause you an incredible amount of stress, addition external adviser fees and even could put your whole business model at risk.

GoCardless high level case study

They were treating their services as exempt from VAT, however this treatment has been at risk since Revenue & Customs Brief 54/10 was issued on 12 January 2011.

I am not privy to any private details or confidential information on this company and it may be that they had some initial advice, but I do wonder

  • if the tax risk was looked at commercially and

  • did the Management and Advisers aggressively pursue exempt treatment and if so why?

In their scenario, from a risk perspective looking at GoCardless from a distance, there is:

  • High risk of successful HMRC challenge on applying exempt status based on the nature of the income

  • High risk of non-recovery of historical VAT from their customers, if there was an unfavourable outcome due to the low value high volume nature of their sales, because the administration burden would be large, debt collection costs would be high and the reputational damage would make pursuit unpalatable

  • Low risk to their commercial model if they added VAT originally to all their sales, because they trade B2B, offering a very low value product to either VAT registered entities who can reclaim the tax, or non-registered entities who are likely to perform a cost benefit analysis of VAT registration.

So not effectively managing their tax risks opened them to potential output VAT claims of over £10m (based on their published accounts and a 50% year on year growth assumption for 2019).

If they traded overseas, then there may be further tax jurisdictions that require review. The VAT treatment will be the same in all European Countries, so if GoCardless traded within the EU did it breach those countries' VAT registration limits?

It's certainly not a comfortable place to be.

What does this example say about the Board's attitude to tax regulatory risk?

What's most bizarre in GoCardless' case is that none of the risk statements or audit reports within the Annual Statements mention this risk.

Did no one know?

Were the directors focused on FCA regulatory compliance, GDPR, Information Security but not tax regulatory compliance?

Have the Board demonstrated an unintended high risk appetite for tax regulatory risk by this oversight?

Are HMRC likely to look at their other tax areas to check for further oversights?

There are a lot of questions, to which I don't have the answer, as I don't have visibility of their true governance or Board actions.

However, if you are on the Board of, or an Investor in, a growth to medium sized entity what would your answers be in respect of your organisation?

Spur Support Services total tax risk monitoring service

If you are the Director of a exciting high growth enterprise, I really want to help you with my Proactive Tax Risk Management Service.

My service offers you the benefit of my commercial in-house tax risk experience to understand, record and assess your tax risk areas and help you communicate them at Board level, by establishing an ongoing trusted adviser relationship.

Please contact me, so that I can help you to avoid surprises and have effective tax risk discussions, or set up an appointment for a free 30 minute chat about your business.

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