What Are the HMRC Guidelines for VAT Compliance?
HM Revenue & Customs (HMRC) has recently introduced a series of guidance notes under its new Guidelines for Compliance (GfC) programme. The stated purpose of these guidelines is to provide greater clarity around HMRC’s compliance expectations and to help taxpayers avoid non-compliance. By following the GfC, businesses are generally considered lower risk by HMRC, reducing the likelihood of enquiries and the risk of paying additional tax, interest, or penalties.
One of the most significant recent additions to the GfC collection is GfC8, published on 18 September 2024 (updated 25 September 2024), which focuses specifically on VAT compliance controls. This makes it essential for those responsible for VAT within an organisation, from VAT managers to senior accounting officers, to familiarise themselves with the expectations set out in these guidelines. The guidance is extensive, covering not only the processes and controls HMRC expects to see, but also emphasising the importance of documenting these processes and the decisions behind them.
Why the GfC Matters?
The introduction of the GfC represents a significant development in HMRC’s approach to compliance. Similar to areas such as transfer pricing, where documentation of decision-making has long been important, the GfC now places VAT squarely within this framework. HMRC expects businesses to document their VAT processes and internal controls in detail, demonstrating not only that these procedures exist, but also that the company actively manages compliance risks in a structured and responsible manner.
While the transparency offered by the GfC is welcomed, businesses may find that the administrative burden has increased. Detailed documentation, risk assessment, and structured internal processes are now part of HMRC’s expectations for demonstrating VAT compliance.
Background of the Guidelines for Compliance
The GfC programme originated from the Spring Budget 2021, when the government announced a review of tax administration for large businesses. Following stakeholder engagement, HMRC committed to developing a series of Compliance Guidelines to provide practical guidance on complex or widely misunderstood areas of tax. The aim was to provide taxpayers with practical advice on HMRC’s approach to risk and compliance, helping companies understand what constitutes high- or low-risk behaviour and how HMRC responds. The first GfC (GfC1) on PAYE Settlement Agreements was published in December 2022, with subsequent guidelines issued at intervals. By September 2024, HMRC had published GfC7 (Transfer Pricing) and GfC8 (VAT Compliance Controls), and the collection has continued to grow. As of early 2025, there are 12 published GfCs covering areas including R&D tax relief, IR35, capital allowances, football agents’ fees, patent box, and labour supply chain assurance, among others.
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The purpose of these guidelines is clear: HMRC wants to reduce uncertainty for businesses by highlighting approaches that can lead to inaccuracies and by providing practical insight into how the law is applied. The GfC offers a framework for companies to plan, implement, and review their accounting and compliance processes in a way that aligns with HMRC’s expectations.
GfC for VAT (GfC8)
The GfC for VAT focuses heavily on business systems, processes, and internal controls. HMRC expects taxpayers to identify potential non-compliance risks and continuously work to improve processes where risks are identified. Importantly, HMRC recognizes that these guidelines are not one-size-fits-all; compliance approaches should be tailored to the size and complexity of the business.
The guidelines emphasize that processes should be clearly owned and managed. Employees should understand their responsibilities, and there should be an independent evaluation of both risks and controls. In particular, HMRC highlights that documentation is central to demonstrating compliance.
GfC8 is specifically aimed at UK VAT-registered businesses that use invoice accounting, meaning they generally account for VAT when invoices are issued and received. HMRC clarified the scope in an update on 25 September 2024. While the principles of good compliance practice are broadly applicable, the detailed guidance on controls and processes is tailored to invoice accounting businesses.
The Importance of Documentation
According to the GfC, well-documented VAT processes should:
- Show clear ownership and accountability.
- Include sign-off at appropriate levels of management.
- Be regularly reviewed, updated, and version-controlled.
- Cover the complete process, with step-by-step guidance.
- Include checklists to ensure completeness and adherence to deadlines.
- Be easily understandable for staff, supporting training and succession planning.
Documentation is also expected for internal controls. HMRC expects businesses to:
- Define the scope of VAT-related controls across business functions, IT systems, and locations.
- Document whether processes are handled in-house, via a shared service, or outsourced.
- Map the flow of transactions and identify the control activities within each process.
- Keep all process documentation up to date and version-controlled.
Additionally, HMRC suggests using a VAT risk register to record risks, control activities, testing methods, and monitoring plans. Staff roles, responsibilities, and training processes should also be clearly documented, along with escalation procedures, contingency plans, and succession planning.
Specific Areas Covered by the GfC for VAT
The guidance goes beyond general principles, covering specific VAT processes in detail, including:
- Order to cash – ensuring VAT is correctly applied to sales.
- Procure to pay – ensuring VAT is correctly recorded on purchases.
- Employee expenses – managing VAT on reimbursements.
- Record to report – reconciling accounting and VAT records.
- VAT reporting – preparing and submitting accurate returns.
- Correcting errors – handling VAT mistakes in a documented and compliant way.
For businesses that outsource VAT compliance processes, the GfC highlights that outsourcing does not transfer legal responsibility for VAT. HMRC expects businesses to document all stages of outsourcing, from planning and tendering through contract drafting and implementation to ongoing monitoring.
Implications for Businesses
The GfC for VAT represents a new benchmark for compliance. Businesses that align their processes with these guidelines are likely to be regarded by HMRC as lower-risk taxpayers, reducing scrutiny and potential penalties. However, the guidance also raises the bar for compliance, requiring robust internal processes and thorough documentation.
For those responsible for VAT compliance, including VAT managers, finance teams, and board-level executives, the message is clear: familiarity with the GfC, its implementation, and comprehensive process documentation is now expected. In practice, HMRC may request contemporaneous documentation at short notice to demonstrate the legitimacy of VAT decisions, even when they follow existing guidance.
GfC8 goes significantly beyond the requirements of Making Tax Digital (MTD). While MTD focuses on digital record-keeping and the submission of VAT returns, GfC8 requires businesses to assess processes and controls across upstream finance areas that feed into the VAT return, including customer and supplier onboarding, accounts receivable and payable, procurement, and employee expenses. Businesses should also note that the Autumn Budget 2025 announced mandatory e-invoicing for all VAT invoices from April 2029. This will provide HMRC with real-time access to transactional data, making robust internal controls and accurate VAT coding even more critical. GfC8 can therefore be seen as an important step in preparing for this wider digital compliance landscape.
Conclusion
HMRC’s Guidelines for Compliance (GfC), particularly GfC8 for VAT, provide businesses with unprecedented clarity on what constitutes compliant behaviour. At their core, these guidelines emphasize that VAT compliance is not just about submitting accurate returns; it is about building structured processes, implementing robust controls, and documenting every step of VAT decision-making.
For businesses in the UK, this means reviewing existing VAT processes, strengthening internal controls, and ensuring that documentation meets HMRC’s expectations. Doing so not only reduces the risk of penalties and HMRC enquiries but also demonstrates a responsible and proactive approach to VAT governance.
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