Recently, a new client approached us – let's just call them Company X. They called us with significant apprehension because they had just received a letter from HMRC. Instead of the expected VAT refund, they found a list of probing questions. The very tone of the letter indicated that this would be no mere formality.

Company X operates internationally. Formally, it held a UK VAT number, even though its management and accounting services were located outside the UK. On paper, everything seemed correct: VAT declarations were filed, refunds were received regularly, and contracts were executed on time. However, practice proved to be more complicated. HMRC began to inquire not about forms, but about fundamentals: where the business was truly conducted, who made the decisions, and why taxes should be settled in the UK.

When the authorities ask questions...

In running a business, there comes a moment when, unexpectedly, it's not a client or a business partner, but the tax authority that poses the most difficult questions. You think everything is in order, you send in your declarations, wait for a VAT refund, and plan new investments. Until one day, a letter from HMRC lands in your mailbox. It doesn't contain a payment decision; instead, it's a list of detailed questions: „Where were the services actually performed? Who made the key decisions? Do you have a permanent establishment in the UK?”

And suddenly, it turns out that the authorities are no longer interested in just the numbers, but in the entire structure of your business.

This was precisely the case with one of our clients' companies. An enterprise that for years operated under the conviction that its VAT settlements in the UK were in order. Invoices were sent on time, declarations were filed regularly, and tax refunds arrived quarterly. Everything indicated that the system was working flawlessly—until... A single inquiry with questions from HMRC opened Pandora's box. The authorities began to analyze not only invoices but also where profit was truly generated, who controlled it, and even whether decisions were made within the UK or entirely outside the country's territory.

Where does the trap lie?

What appears to a business owner as a minor detail can often be a crucial point for the tax authority. In this company's case, HMRC questioned something that seemed obvious: that if there's a VAT number in the UK and tax is paid there, then the matter is clear.

Meanwhile, the authorities began to inquire: were the services truly performed in the UK, or perhaps in another country? Where were the decisions actually made? And suddenly, the entire structure of their settlements began to falter.

The question of a so-called "permanent establishment" arose: whether the company merely uses a registered address or genuinely conducts business on-site. Just a few elements indicating a real presence in the UK are enough for the authorities to determine that taxes should be settled there.

Additionally, doubts arose regarding the very nature of the services. Perhaps, under the regulations, they qualified differently than assumed, which would mean a change in the place of taxation. There are regulations that define this very precisely, but their interpretation is not always straightforward.

Finally, the lack of proper communication only made matters worse. Declarations were filed, but without any explanations. And the authorities clearly emphasize that the taxpayer is responsible for the accuracy of their settlements and the choice of the right advisor. If an advisor does not act professionally, the consequences still fall on the entrepreneur (Taxpayer Charter).

More than just accounting, it's strategy!

Here's the key takeaway: accounting isn't just about entering invoices into a system.

In this company's case, declarations were submitted, but no one analyzed whether they complied with HMRC practices. There were no responses to the authority's questions, no interpretation of regulations, and no clearly described logic explaining why VAT should be accounted for in a specific way.

Furthermore, a UK VAT number alone offers no guarantee of security. What truly matters is how and where the business is actually conducted. There are precise regulations defining this, and if a company doesn't comply, the authorities will quickly notice.

Against this backdrop, the issue of responsibility also arises. HMRC clearly states that the taxpayer is responsible for the quality of data in their declarations. And if an advisor proves incompetent, the authority may request proof that the entrepreneur verified their qualifications. This means that even the choice of an accountant is of immense importance for the company's security.

Consequences Beyond VAT

HMRC withheld VAT refunds, but this is just the beginning of potential problems for companies like our client's. Other issues at stake include:

• the obligation to register for Corporation Tax in the UK (Corporation Tax Act 2009),
• the company being covered by the CIS (Construction Industry Scheme), if it commissions work from local subcontractors (CISR12000 HMRC Manual),
• and even future employer obligations under PAYE and NIC contributions (HMRC Employer Guidance).  

It's also important to remember the broader legal context. Poland and the UK are parties to a double taxation agreement, as well as signatories to the MLI. Both these documents provide authorities with the tools to determine where business activities should actually be accounted for. If HMRC determines that a permanent establishment, it can demand not only back taxes, but also interest and penalties.

On top of that, there's reputational risk, because data on unclear settlements can enter the CRS (Common Reporting Standard), which is the global exchange of tax information. This means that a problem in one country can quickly become a problem in several jurisdictions at once.

Business owners often ask me: “So what should we do? Is it even worth operating in the UK?” The answer isn't black and white.

It all depends on how well you prepare.

If your company genuinely conducts part of its business in the UK, and you have the appropriate documentation, contracts, and processes, this solution might be beneficial for you. But if you treat UK VAT as an easy way to bypass the Polish tax authorities, sooner or later, the authorities will come knocking.  

Our client's story isn't one of ill intent or deliberate tax evasion. It's rather an example of how easy it is to get into serious trouble when a business operates in multiple countries and tax decisions are made without proper analysis. In taxation, "it'll somehow work out" doesn't exist; what matters here is accuracy, documentation, and a consistent strategy, which can be presented to the authorities at any time.

Fortunately, Company X came to us just in time. We helped them organize their documents, clarify officials' doubts, and develop a future action plan. Today, the entrepreneurs know their obligations in Poland and the UK, and their structure is legally compliant and secure with HMRC.

This is the essence of the entire lesson: it's not about escaping taxes, but about running a business in a way that provides peace of mind and certainty for years to come. And at TaxOne, we're here to provide that peace of mind.