19 January 2023

Over the past few months, we have witnessed a targeted VAT campaign by HMRC in the motor retail sector. HMRC is concerned about differences in the reported values of vehicle sales within the retailers’ dealer management system compared to third party finance proposal systems or e-invoicing portals.

HMRC states that many businesses will be unaware that they are making such errors. Therefore, as part of the campaign, HMRC is requesting that retailers join an educational training webinar outlining the importance of correct valuation and to help them identify reporting risks. Like the now ubiquitous ‘nudge’ letters that HMRC uses, this is clear blanket prompt to address the issue.

Certain finance proposal systems are known to cause more issues than others, and this matter can also be complicated where self-billing is utilised by some finance houses.

It’s an interesting move from HMRC, asking retailers to watch the webinar and then submit ‘error correction notices’ should any errors be identified. HMRC also requesting dealers to confirm whether any system/process changes have been made in order to be VAT compliant.

The crux of the issue comes down to where retailer documents don’t match with those created by the finance house. Whilst most groups have issued guidance to stop bumping, some individuals have continued to do so or they are unaware of the consequences. The issues more relate to mismatches in the documentation held and issued by retailers compared to the finance house.

Given that retailers typically issue the finance documentation to the customer on behalf of the finance house, and it is the finance house that legally makes the sale to the end-customer, retailers are at the heart of the supply chain and are therefore the target of HMRC.

In our experience, the use of bumping has generally stopped as a practice within the sector. It is therefore typically retailers that are being innocently caught out by this, and not having sufficient controls and reconciliations in place to catch errors. There are instances where the difference between retailer valuations and the amounts financed can be perceived as bumping but could in fact relate to personal loan products or other non-VATable supplies. However, the documentation may tell a different story. This is the reason that documentation needs to be as clear as possible and it is paramount that retailers understand and check the documentation issued on behalf of finance houses to the final customers.

Wider considerations

The immediate concern is that if errors are not identified and rectified voluntarily by retailers themselves, should HMRC find them later it will be strict in imposing penalties, ie not accept that errors have occurred despite retailers taking ‘reasonable care’.

Whilst an argument may still be made that any error occurred despite taking ‘reasonable care’ therefore mitigating penalties, given the targeted nature of HMRC’s campaign and requirement for a positive response following the webinar, it is possible that it may seek to apply penalties for a ‘careless’ error, which could be significant.

This is particularly concerning for large businesses under the SAO regime (where personal penalties can be levied upon the appointed SAO), drawing into question the businesses’ overall VAT processes and controls.

As HMRC is requesting confirmation on whether any system/process changes have been made, SAOs should consider their over-arching tax sign-off processes to ensure that any actions needed are reviewed and captured.

Response from retailers

We have seen varying approaches from retailers, and many of the groups which we work with have undertaken historical reviews to either confirm that there are no historic errors, or to identify and disclose such errors now. A number of retailers have also reviewed their current controls and processes to make them more robust and/or have implemented further supplementary controls or reconciliation checks.

We are also discussing with several groups the possibility of automating any such checks which are currently manual and time consuming for them. For any businesses that have not yet addressed this topic, we would strongly recommend that they do so quickly. Even if they consider they have strong internal controls, it is worth putting these to the test and documenting this as part of any future defence that could be useful during an HMRC enquiry.

As a starting point, a really valuable exercise is to map out the end-to-end process for each finance partner, documenting key information, including by way of examples:

• How each finance proposal system works in practice, including any known ‘quirks’
• The different finance products offered, including any supplementary finance products such as personal loan products to cover negative equity, insurance products, etc
• Whether self-billing is used, and how these invoices are generated and stored;

An assessment can then be carried out per finance partner to review the current adequacy of the related controls, processes and documentation held on file.

Undertaking such an exercise has enabled groups to implement front-end solutions to address gaps and high-risk areas, such as training for staff, the introduction of Standard Operating Procedures, additional review layers, etc.

Groups are also looking at back-end solutions to automate reconciliations as a last line of defence to try and identify any errors that need to be reviewed and potentially corrected.

Chris Rowe is a tax partner at BDO. Ravi Gohel is VAT associate director at BDO

Tags: BDO Ravi Gohel, Chris Rowe, HMRC, SAO, VAT