Agenda item

The Director of Finance and Section 151 Officer presented a report on the subject of the updated VAT recovery position.

Members were advised that, following the implementation of a new financial system in 2021, a number of issues had arisen, compounded by staff turnover and weaknesses in processes at that time. As a result, VAT returns had not been submitted to HMRC for the period April 2021 to October 2024 and HMRC had therefore been holding funds due to be returned to the Council. A chronology of events had been provided within the report.

It was reported that, once the issue had been identified, it had been agreed with HMRC that Error Correction Notices (ECNs) would be submitted in order to recover the funds. An initial sum of £472,000 had been received in December 2024, which was subsequently reversed through the ECN process. Further work had been undertaken to review the ‘General Ledger’ and identify additional amounts where VAT had not been appropriately accounted for. A final ECN, submitted on 12th June 2026, totalled £1.79 million, resulting in a net position of approximately £1.76 million due to Bromsgrove District Council from HMRC.

Members were advised that this recovery would have a positive impact on the Council’s cash position. It was noted that the accounting for each of the affected years had already been reflected in the Council’s accounts and therefore no additional reserves would be created. However, the improved cash position would reduce the need for borrowing and provide increased opportunities for investment. Confirmation from HMRC in relation to the final ECN was yet to be received.

In considering the report, Members had detailed discussion and commented on the following points:

·       Reference was made to Redditch Borough Council’s position, where a significantly larger sum had been identified. Officers explained that this reflected structural differences between the authorities, including Redditch’s larger budget, larger capital programme and the operation of a Housing Revenue Account, which all led to a higher volume of transactions and associated VAT. It was further noted that Bromsgrove was responsible for billing Redditch for a higher proportion of Shared Services provided between the authorities.

·       Members queried the accuracy of the figure for Bromsgrove. Officers advised that, whilst the amount had been calculated based on the information available, it could not be formally confirmed until HMRC had completed its review.

·       Concerns were raised regarding previous estimates that had suggested a significantly higher figure. It was noted that the situation was very complex and figures were continually changing until the claim had been submitted to HMRC.

·       Discussion took place regarding the VAT treatment of shared services between Bromsgrove and Redditch. Officers explained that as a result of the arrangements i.e. Bromsgrove billing Redditch, the VAT position was offset in Bromsgrove but increased in Redditch. Bromsgrove was not charged VAT on the underlying costs e.g. salaries, but Redditch was charged VAT on the same services as they were purchasing a vatable service from Bromsgrove. This led to a higher recovery of VAT in Redditch than Bromsgrove.

·       Members sought clarification on whether Bromsgrove had been disadvantaged by these arrangements. Officers outlined that this was not the case as this was about delayed recovery of VAT, not a benefit. It was noted that the complexity of VAT accounting within shared services made direct comparisons between the authorities difficult.

·       Members questioned how the issue had not been identified at an earlier stage. Officers advised that the implementation of a new financial system, combined with staff turnover and a lack of specialist VAT expertise at the time, had contributed to the oversight.

·       Further concerns were raised regarding the role of internal and external audit in identifying the issue. Officers clarified that internal audit operated on a risk-based approach and reviewed specific areas rather than providing continuous oversight of all processes. External audit provided assurance on the overall accounts, but delays in the production of accounts for the relevant period had limited this assurance.

·       The financial implications of the delayed recovery, including the potential loss of investment income. Officers advised that, whilst this could be estimated, there was no mechanism to reclaim such losses from HMRC.

·       The importance of strengthening financial controls and processes was emphasised. It was confirmed that Internal Audit had been tasked with undertaking a review of existing arrangements to provide assurance and identify any necessary improvements.

·       Members acknowledged the need to focus on ensuring robust systems were in place going forward.

The Cabinet Member for Finance expressed thanks to the Director of Finance and Section 151 Officer for presenting the report. He noted that securing a net cash recovery represented a positive outcome for the Council’s financial position and, as outlined in the report, reflected a comprehensive retrospective review. It was reiterated that, as these adjustments had already been processed, they constituted a direct improvement to the Council’s cash flow rather than impacting on reserves.

The Cabinet Member for Finance emphasised that, when making comparisons with Redditch Borough Council, it was important to recognise the differing structural profiles of the two authorities.

RESOLVED that

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

2) An expected net cash gain position to be recovered by the council, including the further anticipated recovery of the current Error Correction Note, be noted.

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

4) The Audit, Standards and Governance committee is requested to maintain oversight of the delivery of actions to satisfy any agreed penalty suspension conditions.