Last year, HMRC increased scrutiny on VAT registrations, rejecting 17% of applications. Of 314,000 applications, only 261,000 were approved, 52,000 failed to meet HMRC's stringent rules, and 1,000 were withdrawn.

HMRC's excessive caution against VAT fraud could hinder business growth despite its success in clamping down on fraudsters, some of whom face substantial penalties.

Businesses have faced additional challenges due to HMRC's customer service struggles. The average caller now waits over 25 minutes to connect with a VAT officer. This situation is expected to persist until HMRC utilises its latest £51 million emergency funding to improve helpline operations.

VAT applications are typically rejected for two primary reasons. First, HMRC may find the application contains incorrect information, such as errors in the personal details of company directors, addresses, business descriptions, or financial details. Second, HMRC's misunderstandings, especially regarding business activity descriptions, can lead to rejection.

Applications can also be withdrawn by businesses, often due to HMRC requesting more information or the business misinterpreting VAT rules and the requirements for registration.

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