7 Risks of VAT Non Compliance

13 January 2023 | Finance, General

All the suppliers of goods or services VAT registered in the UK charge the appropriate VAT rate and collect all the tax for the onward payment to the UK tax authorities through a VAT filing.

A value-added tax, which is known in some countries as a goods and services tax, is the type of tax that is assessed on the incrementally. It is levied on the price of the products and the services at each stage of production, distribution and sale to the end consumer.

In this article, you will get to the information about VAT, examples of VAT, and everything in detail.

Let’s Begin!

What Is Value Tax?

VAT was a European creation. French tax authority Maurice Laure introduced it in 1954. However, the idea of taxing each stage of the production process was said to have been floated a century earlier in Germany.

Value-added tax (VAT) is the consumption tax on goods and services which is levied at each stage of the supply chain where the value is added, from the initial production to the point of sales.

The amount of VAT the user pays is based on the cost of the product minus any costs of materials in the product that have already been taxed at the previous stage.

It is added to all the products, and the supply chain is added everywhere. Advocates always claim they raise government revenues without punishing the wealthy by charging them more through an income tax.

Examples of VAT

Here are some examples of VAT:

  • A farmer always sells wheat to a baker for 30 cents, and the baker pays 33 percent; the extra 3 cents represent the VAT the farmer sends to the government.
  • The baker uses the wheat to make bread and sells a loaf to a local supermarket for 70 cents. The baker sends 4 cents to the government; the farmer pays the other 3 cents. And the supermarket pays 77 cents, including a 7-cent VAT.
  • Finally, the supermarket sells a loaf of bread to a customer for $1. Out of the $1.10 paid by the customer and the base price plus the VAT, the supermarket sends 3 percent to the government.

7 Risks of VAT Non Compliance

Tax authorities always take VAT noncompliance very seriously. VAT is the most common indirect way of tax in the world and it is also an increasingly important source of revenue.

All the Authorities are becoming more innovative in their techniques to detect noncompliance, from real-time reporting to advanced machine learning that can detect irregularity. In addition,the cooperation between agencies in different countries makes cross-border value-added tax fraud harder to achieve.

Failing to meet complex VAT requirements has serious risks. While penalties and interest charges have become the most apparent consequences for noncompliance, they are also severe additional business risk.

In default, to meet the basic VAT requirements can damage the company’s reputation and prevent it from doing business. There are the 7 Risks of VAT Noncompliance:

  1. Fines And Interest Charges

If someone fails to submit and return a complete and correct VAT on time, it can lead to a fine. Once a company fails to account for VAT, the federal tax authority imposes a surcharge period. During the surcharge period, the penalty owed  by the company always  continues to grow for as long as it fails to meet the  VAT obligation.

  1. VAT inspections and extended audits

Failing to meet your VAT obligation can always trigger an HMRC VAT inspection. Inspections may be intrusive and time-consuming. More significantly, they could reveal further noncompliance, resulting in additional penalties. To avoid this, you should take advice from an expert VAT fraud investigation specialist.

  1. Reputational damage

If a business is known to be under investigation by tax authorities or on the receiving end of penalties, it can undermine confidence in its resilience. More dramatically, when a business is under investigation, authorities may contact your significant clients or the suppliers to ask for a record of their transactions with your company. This can be embarrassing and reputationally damaging.

  1. Barred from trading on platforms

As e-commerce has become central to the global economy, policymakers have updated VAT rules. One significant innovation is also to make online platforms responsible for VAT collection. In these cases, the platform may require a business to provide a valid VAT number to operate.

  1. Banned from trading

Tax authorities can ban a business from trading for a specified time if it deliberately fails to pay VAT, the risk of being banned from trading can also affect any business, even sole proprietors.

  1. Criminal charges

The consequences of deliberate VAT noncompliance are incredibly severe. VAT fraud always be punished with imprisonment and unlimited fines.

  1. Other tax liabilities

If an investigation reveals false invoices or other anomalies, this could lead to other irregularities. For example, a misleading tax invoice always means the business’s corporate income tax returns should be inaccurate.


Value Added Tax (VAT) is a tax which is levied on every  product. With VAT, and also a portion of the tax amount paid by the various parties, it is also a  tax on a product or service which is given when the seller adds value to the product or service.

As we went through the article, we learned about VAT and the risk of VAT Noncompliance.

The main aim behind the introduction of the VAT is to eliminate double taxation and the cascading effect of the then-existing sales tax structure. A cascading effect occurs when a tax is levied on a product at every sale step.


  • Danielle Stone

    She has been writing professionally for 8 years, with articles published in various print and online publications. She is an avid researcher and strives to bring her readers the most up-to-date information and insights on the topics she covers. Danielle is also an expert on home renovation, interior design and construction, and she loves helping homeowners turn their dreams into realities. When she’s not writing or editing, Danielle enjoys spending time with her family, gardening and exploring nature.

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