The auditor general has finally poured cold water on one of last year’s biggest tax myths...

It was a catalogue of system and staffing errors which was responsible for delays in processing new VAT registrations, not accountants after all.

Acting HMRC CEO Dave Hartnett, had on several occasions since April 2007, planted the blame on accountants, well, apparently one firm of accountants as being responsible for causing the huge bottleneck that created the delays in processing new VAT registrations that have frustrated accountants and clients over the last year and a half.

Hartnett claimed that one firm had filed over 20 thousand VAT applications in one month, following the introduction of the managed service company legislation in April 2007. The legislation of course forced many back into business on their own and there was a rise in new company registrations, but observers were surprised that these would also all need to register for VAT too. Taxation magazine did its level best to try to track down the "tax anarchists" responsible, but it came to nothing. Privately we had all concluded that it was a physical impossibility, no one firm could process that number of registrations so swiftly.

The auditor general qualified HMRC’s accounts again this year due to tax credit fraud, he still found space in his report to comment on VAT issues affecting the departmental accounts. He blamed a combination of factors contributed to “the deterioration of VAT registration performance:”

• Increased checks to counter the threat from fraudulent traders, together with other measures, helped the Department to tackle missing trader fraud, reducing the estimated VAT losses by£1 billion. But some risk parameters were poorly targeted, resulting in more legitimate applications being subjected to delays whilst being checked than might otherwise have been necessary.

• These additional checks coincided with there organisation of the Registration Units which didn’t happen as planned and resulted in significant staff shortages. The Department released experienced casual staff before it had redeployed permanent staffroom other parts of the Department. This situation was exacerbated by an increase in general staff turnover. Staff also took longer to process applications against background of increased computer problems, and significant increase in applications from traders seeking to circumvent legislative changes.

• The restructured risk team initially took longer to process the registration applications owing to the inexperience of the new team and the lack of access to the appropriate computer systems.

• The VAT registration computer systems could not provide reliable information on the level of work unhand as the data was not robust. Also, staff shortages meant that some applications were not entered promptly on to the registration computer systems. The Department was not fully aware of the increase in work on hand until it undertook a manual exercise in August 2007, which assessed the level at48,000 applications.