Receipt compliance

Your complete guide to VAT and HMRC compliance

January 30, 2020
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When it comes to VAT and HMRC compliance, there is always confusion around expense tracking and deductions. The best defense your business has to implement an expense management software is to stay compliant while doing minimal redundant work.

Tax rules and regulations are confusing to understand. Despite that hurdle, it’s your responsibility to ensure that your organization complies with all of the tax rules. Failure to comply, even for innocent mistakes, could result in substantial fines for the organization.

Read on to learn about the importance of VAT and HMRC compliance, the common mistakes that businesses make, and how to avoid them.

The importance of VAT and HMRC compliance

The HMRC could send a compliance notice to your business at any time. They're looking for issues to make sure that your business is paying its fair share in taxes. Compliance and inspections are on the rise, and you should stay audit-ready at all times! 

But what if you're found to be non-compliant? Even if you made a simple error on your tax return, your business could be subjected to fines and penalties by HMRC.

How much the fines and penalties will cost will depend on a couple of factors:

  1.  The first factor is the amount of money that was lost in tax revenue. 
  2. The second factor is how HMRC discovered the issue. 


  1. If you found the error and reported it promptly to HMRC, they may be lenient with you. This falls under the category of "unprompted disclosure."
  2. The penalty guidelines for inspectors state that they can assess a penalty between 10% - 30% of what they consider to be lost revenue.
  • If you don't discover the issue, but HMRC does, then that's a different story. This is a prompted disclosure that can result in a minimum 30% penalty.
  • Should HMRC believe that the errors were deliberate, the penalties can become severe. These errors can turn into a penalty between 30% - 100% of lost revenue. 
  • In some cases, HMRC can prosecute offenders.

Common mistakes that companies make when claiming VAT and employees expenses

Businesses are under more scrutiny as the HMRC is emphasizing compliance, and is attempting to hold those who aren’t abiding by the rules. HMRC inspectors look for particular things when they’re auditing your taxes. Here are some mistakes that many businesses get wrong:

Lack of policy and approval process

How are your employee expenses approved? Is there a standard policy, or is it done on a whim? HMRC Compliance inspectors will look for a standard policy and procedure to submit and approve employee expenses.

The policy needs to be clear and document all reimbursable and non-reimbursable expenses incurred by your employees. It should also have specific rules around mileage reimbursement and cash advances.

No receipts to back up claims

If you’re going to claim expenses, the onus is on you to prove that the expense occurred and is legitimate. If you can’t prove it, then the HMRC will determine that you paid your employees a nice bonus that was tax-free.

HMRC inspectors are likely to penalize you, even if you misunderstood the law or made an honest mistake. Hence, you must maintain accurate records and receipts to ensure HMRC compliance. 

Unaware of International VAT rules

Your business may be paying more than you should in taxes because you’re not aware of the international tax laws. There are about 40 countries that your employees travel to, which may allow you to reclaim part of VAT expenses.

The problem of recovering these expenses is that each country has its legislation, which outlines what you can recover and what you can’t. That can make tracking expenses and recovering what you’re entitled to challenging. These countries also don’t make it easy to submit claims, and you’re likely to get rejected in the process.

When you look at the time and resources required, you’re likely to assume that it’s not worth the effort to make a claim. But this is where an expense solution can help you in this process.

Suggested Read:

Can you reclaim VAT on employee expenses?

How can businesses effectively reclaim VAT on employee expenses?

Some rules allow companies to reclaim a portion of VAT on employee expenses. To claim these expenses, you need to have paperwork such as invoices with your company name on it. But, when employees travel for business, that’s not feasible.

For some situations like a coin-operated machine or tolls, it’s almost impossible to get any receipt. In such cases, you may be able to reclaim VAT, but the cost of the purchase can’t be more than £25. (Since there isn’t paperwork, it’s up to your employees to track and report these expenses.)


  • Do your employees travel for business? They may be able to reclaim VAT on fuel if you pay a mileage allowance to your employees. For this, your employees have to provide fuel receipts for you to file the claim.

Suggested Read:

How to manage receipts to ensure your team is always audit-ready?

How can an expense management software help with  VAT and HMRC compliance?

There are a lot of things to understand when it comes to VAT and HMRC compliance. Plus, there are a lot of risks to your business if you get it wrong. This brings us to the question - How can you manage all of these possibilities? 

The only thing that makes it easier is to use an expense tracking software. There are several advantages to using such a program, such as:

  • From better analytics and reporting to easier tracking for all of your employee business expenses. 
  • Expense tracking will leave an easily traceable digital audit trail that helps you stay audit-ready at all times. 

Should an HMRC inspector ever have to examine your books, they’ll look for this audit trail to make sure that your company has a process. Not only will you lower your risk, but you’ll also be able to claim all of the tax deductions.

Would you like to know more about using Fyle as an expense management software? Schedule a demo and discover why businesses of all sizes rave about us!


Effortless expense management for all business spends. Earned time, saved costs, improved productivity, happy employees - achieve it all with a single software.

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