Agenda item

The VAT Recovery Progress Update report was presented. Members were advised that the report had previously been considered by the Executive Committee. The report was presented before the Audit, Governance and Standards Committee due to the financial implications of the matter, a significant cash repayment from HMRC, which had a direct impact on Treasury Management, an area that fell within the Committee’s remit. Secondly, the Committee had asked to review the actions agreed with HMRC to ensure that penalty suspensions remained in place.

Members were informed that the Council had been unable to submit VAT returns between April 2021 and October 2024 due to issues linked to the implementation of the Council’s financial system (TechOne), and associated issues of staff turnover and misalignment of processes in relation to VAT. It was reported that corrective action was being taken, with  the initial Error Correction Notice submitted to HMRC after monthly VAT returns were reinstated in November 2024 and a subsequent Notice submitted in November 2025.

The Committee was advised that the Council had received a net cash repayment of approximately £19.9 million from HMRC. Whilst this improved the Council’s cash position, Members were reminded that the underlying accounting transactions had already been recognised in previous financial periods. It was emphasised, however, that the return of these funds had implications for the Council’s Treasury Management strategy and would need to be incorporated into future financial planning considerations.

In relation to compliance, Members were informed that HMRC had agreed to suspend financial penalties on the condition that the Council implemented and maintained a number of specific actions. These actions included strengthened processes for VAT returns and enhanced assurance arrangements and conditions were detailed in the report. Audit, Governance and Standards Committee oversight had been requested to ensure that these requirements were being met on an ongoing basis.

The Committee was further advised that the Council had been working closely with external specialists, PS Tax, to strengthen its VAT arrangements. Although VAT returns were currently produced through a manual process, it was reported that returns were now being submitted on a monthly basis and that confidence in the revised processes had significantly improved. Members were reassured that additional assurance measures had been introduced and that regular updates would be provided to the Committee to demonstrate compliance with HMRC requirements.

Officers also highlighted improvements in resourcing within the VAT team. A permanent member of staff had been appointed to focus on VAT work, supported by additional temporary resource to enhance accuracy and ensure the timely submission of returns. Training on VAT was being delivered within the finance team and to managers across the organisation.

During discussion, Members welcomed the recovery of funds and the strengthened processes now in place. However, questions were raised regarding why the issue had not been identified sooner. In response, it was noted that the complexity of the TechOne finance system implementation and problems with that implementation, as discussed under previous agenda items, had contributed to the delay in detection. Members also discussed the Council’s risk management arrangements, noting that the issue was currently reflected within the corporate risk register under cash flow risk. It was suggested that consideration be given to whether this matter should be recorded as a separate risk to ensure continued visibility and monitoring.

In response to these comments, Officers confirmed that a review of the risk would be undertaken to determine its appropriate categorisation going forward. It was acknowledged that, while the historical risk had been significant, the current position may represent more of an opportunity due to the improved cash position. However, it remained essential to ensure that robust processes were embedded to prevent recurrence

Further discussion took place regarding the impact of the repayment on the Council’s financial reserves. It was noted that a resilience reserve of £2.5 million had previously been established to mitigate organisational risks, including those related to cash flow. Officers advised that the VAT recovery primarily addressed a cash flow issue rather than underlying budget pressures. As such, broader financial risks across revenue and capital budgets remained, and it was considered prudent to retain the reserve while further risk-based financial monitoring arrangements were developed.

Members welcomed the recovery position and placed on record their thanks to the Finance team for the significant amount of work undertaken to resolve the issue, acknowledging the pressures faced by the team throughout this period.

The resolutions as set out in the report were agreed by the Committee.

RESOLVED that

1)    The actions being undertaken to resolve the outstanding VAT matters are noted.

2)    The net cash gain of £19.9 million is noted.

3)    The improvement of this on the cashflow position is noted and the corporate risk register duly updated to reflect the positive change to the Council’s cash holding position.

4)    The Audit, Governance and Standards Committee maintains oversight of the delivery of actions to satisfy any agreed penalty suspension conditions.