The Comprehensive Guide to UK Tax Compliance

What is Tax Compliance?

Tax compliance is the ability and willingness of taxpayers to abide by the tax laws, report their income accurately, and pay the appropriate taxes on schedule. Businesses/traders are typically entangled with value-added tax (VAT) amongst the various UK direct and indirect taxes. In 2021/22, £143 billion of UK’s taxes were collected from VAT.

How is Tax Regulated in the UK?

The UK government controls the majority of taxes in the country, with Parliament setting tax rates, HMRC collecting revenue, and the Treasury deciding how it should be distributed across government.

The Commissioners for Revenue and Customs Act (CRCA) of 2005 established HMRC as a non-ministerial department by replacing the Inland Revenue and Customs and Excise. HMRC reports to the Parliament through Treasury and leads on policy maintenance and implementation as led by the Treasury policies. They work towards ensuring that taxpayers can meet their tax responsibilities by providing guidance to ensure the right amount of tax is collected. 

What is VAT?

VAT is levied on consumer expenditure of goods and services and imports. Unlike a simple sales tax, it is levied on the amount of value added at each stage of the production chain, as the name implies. A retailer, for example, would not be liable for the full amount of VAT if the item sold was purchased from a wholesaler. The standard rate is currently 20% and reduced rate is 5% while some goods and service are zero-rated or exempt from VAT. VAT is reflected in the price paid for items when they are purchased by consumers and is collected from traders – hence why it is referred to as an ‘indirect tax’. 

By virtue of the Finance Act of 1972, VAT was implemented in the UK on April 1, 1973. The Value Added Tax Act of 1983 (VATA 1983) was the first Finance Act to make changes to the law and has also been consolidated; the Value Added Tax Act of 1994 (VATA 1994) followed thereafter.

The Acts provide the general structure of the tax, but the majority of the specifics are contained in statutory documents, such as Orders issued by the Treasury or Regulations issued by HMRC.

The management of this tax has been given to HMRC by the UK Government, formerly known as HM Customs & Excise.

Explanatory notices on VAT are published by HMRC together with VAT notes, news releases, and business briefs. These detail the legal interpretation used by HMRC. 

To maintain compliance with VAT obligations, businesses must understand not only what VAT is but also the specific requirements of VAT compliance. This includes meeting legal standards in VAT reporting, collection, and remittance. For a full guide on VAT compliance essentials, explore our article detailing everything you need to know about VAT compliance. 

General Principles of VAT

VAT, which is collected on business transactions and imports, is a tax on consumer spending. The fundamental idea is to charge VAT throughout the entire process of providing products and services, known as output tax. If the customer uses the supplies for business purposes and is registered for VAT, they will be given credit for this VAT, known as input tax. Businesses are typically not impacted, and the final customer is ultimately responsible for bearing the burden of VAT.

Output Tax

The individual producing the supply is often responsible for paying output tax, which is the VAT due on taxable supplies. Output tax may be owed on business gifts and private use of own goods and services in addition to simple business transactions.

When a unified price is charged for a variety of different suppliers, a particular supply may become difficult since it is a mixed supply. A fair and justified apportionment of the total price must be determined in cases where these supplies are taxable at various rates. Supplies that can be charged at the standard, reduced, or zero rate are taxable.

Input Tax

Input tax on goods and services given to a taxable person may be claimed back if the taxpayer is the manufacturer of taxable business supplies (goods or services). 

Products and services that are not used for business purposes are not eligible for VAT refunds (e.g. for private use). The VAT incurred is typically allocated when items are utilised partially for business and partially for non-business reasons. VAT paid on a variety of things is not tax deductible (i.e. blocked) - for example business entertainment expenses in the UK. 

What is the importance of tax compliance?

Tax policies are always changing. Local governments as well as international and national organisations have the power to alter them. Despite being a non-negotiable laborious process, tax compliance is quite important. For business continuity and protecting its license to operate, all applicable taxes must be paid on time.

Non-compliance to tax laws can have serious repercussions. Strict fines and penalties may be imposed, civil or criminal proceeding questioning the professional competence of business leaders eventually leading to the organisation's brand and reputation can also be impacted. 

At a societal level, tax contributions enable the economic growth. In the UK, HMRC is responsible for protecting the Exchequer’s cashflow and for ensuring that UK’s public services are funded for. All this ultimately is means to invest back into social programs, such as the health care, education, road and rail infrastructure and many more.

Challenges Companies Face with Tax Compliance

Taxes become exponentially complex and hard to decipher for businesses trading beyond their domestic markets. Tax compliance is a strategic business operation that must adapt and evolve in response to the digital transformation, the expansion of regulatory requirements, and the demand for more operational and supply chain resilience. 

During the pandemic, laws and regulations experienced radical upheaval. According to the International Monetary Fund, governments have passed support and stimulus measures totaling more than $33.6 trillion (USD), or 39% of the world's Gross Domestic Product (GDP). This aid frequently came in the form of temporary tax measures.

The unwinding of transitory policies, the return to a longer-term perspective, and the tax reform that was already gaining momentum prior to COVID-19, are all issues that the tax and finance functions must deal with as the world recovers from the pandemic.
 
The difficulties faced by organisations in this shifting global tax landscape are significant. Tax teams must cope with changes in reporting requirements in addition to the importance of being current on the regulatory and legislative landscape. Tax authorities have become more sophisticated in recent years. An ongoing shift to digital filing and a trend toward real-time reporting are raising the compliance, risk, and expense requirements. 

How Can Vertex Help Your Business Be Tax Compliant in the UK?

Companies must maintain compliance or risk fines as the volume and complexity of VAT/GST filings rise. Tax professionals like to 'get ahead of it' rather than react, therefore they seek better control over this. Whether your business is just starting out or expanding worldwide, Vertex’s VAT and GST Compliance Software offers solutions to support you as you grow.

We provide complete tax solutions for large and mid-sized businesses with complex or high-volume supply chain tax transactions, automating every aspect of the indirect taxation lifecycle across all operational jurisdictions.

A robust, proprietary content library that powers our products contains millions of data-driven effective tax laws for 19,000 tax jurisdictions worldwide. We also provide strong pre-built connectors for the major core business applications.

In the face of uncertainty and disruption, Vertex solutions are designed to withstand change, are compliant with different jurisdictions around the world. We provide you with peace of mind that your tax compliance responsibilities in the UK and abroad are being properly managed while enhancing the process to control tax risks and the effective tax rates.