Understanding VAT Inspections: A Comprehensive Guide

Running a business and having to deal with VAT may seem like a lot at the time. If your business does end up getting investigated for VAT, it’s a stressful time regardless of whether or not you have done your VAT returns correctly. A VAT inspection doesn’t have to be a huge ordeal. In most cases, the process is very straightforward. 

The following will discuss what to expect from VAT investigations should they occur, as well as what may cause a VAT inspection to take place. What to do in the event of a dispute will also be discussed in the below article. 

What is a VAT inspection?

VAT inspections take place when the HMRC selects your business for further enquiry surrounding your proclaimed VAT returns. This will usually involve a visit from a representative from the HMRC and entails a series of questions and queries about your business activity. This is a means of getting additional information about your business for their own assessments. 

If you undergo a VAT inspection, then the best thing to do is be totally honest and transparent. It’s also important that you are polite to the VAT auditor when they come to visit. Being respectful in your interactions will go a long way in a VAT investigation. 

What triggers a VAT inspection?

VAT inspections can be triggered for various reasons but can also be avoided. The best way to avoid a VAT inspection is to ensure you file your VAT claims on time and with the correct sum of money owed. However, you may also be selected for further investigation at random. Most VAT inspections are scheduled at random for the HMRC by a computer-generated program. In these cases, you cannot prevent a VAT investigation from happening, but you shouldn’t panic either. 

Another trigger for an inspection may be that the HMRC flags a discrepancy in your information compared to what they have on their system. You may simply be required to update your information according to what is correct or have a VAT inspection to iron out the details of your company. 

There may also be an investigation if your company claims to be selling VAT-exempt products. A VAT inspector will want to come and verify this is true and will therefore visit your business. If the HMRC flags that there are abnormally high tax claims being filed by your company, then this may also warrant a VAT inspection. The HMRC will want to verify that the claims are valid and eligible for payment back to you. 

In some cases, your business may have failed a credibility check in relation to your VAT returns, which will trigger further enquiry. If this happens, you need to ensure that all the information you give to the HMRC is correct. If you work with an accountant who handles your tax affairs, it may be worth having them present to answer any technical questions the representative may have. 

What happens in a VAT inspection?

A VAT inspection will always entail a discussion surrounding the business operations and previous history with tax returns. However, depending on the nature of the investigation, there may also be some additional steps the tax investigator may want to proceed with. In a typical VAT investigation, you can expect the following to take place: 

1. Introduction: The HMRC representative will introduce themselves and explain the purpose of the visit.
2. Discussion: The representative will ask questions about your business operations, VAT returns, and any discrepancies they have found.
3. Documentation: You will be asked to provide relevant documentation, such as invoices, receipts, and bank statements.
4. Verification: The representative will verify the information you have provided and may ask for clarification or additional information.
5. Conclusion: The representative will conclude the visit and provide you with any feedback or next steps.

It may not be the case that the HMRC representative provides you with their conclusion on the day. They may need time to return to their office and consult with the documentation and information you have provided them. However, they will get back to you within a few days after their visit. 

How long does a VAT inspection take?

An HMRC VAT inspection can vary in duration, depending on the size and complexity of your business, as well as the nature of the enquiry. A visit to your premises to inspect your VAT records would normally vary between 1 and 4 days. However, the potential duration of an HMRC investigation is not limited by time and can continue until the required outcome is determined.

In general, an enquiry will usually take place within 12 months from the deadline of your annual review, though this may differ under special circumstances. If fraud is suspected, HMRC can inspect records going back 20 years.

What happens at the end of a VAT inspection?

At the end of an HMRC VAT inspection, the inspector may have outstanding queries and request further information from you. You will normally be given up to 30 days to provide this information. If the officer has found any errors, you may be ordered to improve the VAT record-keeping which your accountant can help you with. If evidence of unpaid or underpaid VAT is uncovered, the HMRC officer will issue an assessment with a penalty which you will be liable for paying. 

The potential duration of an HMRC investigation relates to the nature of the enquiry. An enquiry which identifies no mistakes may lead to an immediate conclusion of the inspection. Errors, whether due to negligence or oversight, may lead to the inspection remaining open a little longer. The most severe circumstance will be if HMRC identifies an error that it suspects is a deliberate attempt to evade tax. This could lead to a prolonged investigation and may result in all the tax affairs of the business being investigated after the initial visit from an HMRC officer. 

Handling Penalties and Disputes

If errors are discovered during a VAT inspection, you may be issued with an assessment, which includes penalties and interest if appropriate. HMRC can charge penalties for VAT errors, the levels of which depend on whether the business came forward to make a voluntary disclosure, whether it was prompted by contact from HMRC, and the extent to which the business cooperated with HMRC to establish the correct position.

VAT errors can be costly, with penalties ranging from 5% to 15% depending on how late the notification is made. If you disagree with an assessment and/or penalty issued by HMRC, you can write to HMRC within 30 days to request a statutory audit.  A statutory review is carried out by a review officer within the Solicitor’s Office and Legal Services (SOLS) business area of HMRC. This is then carried out by a member of HMRC who is unconnected with your case, and HMRC has 45 days to carry out the review. 

If you are not satisfied with the decision of the reviewer, you have 30 days from the review decision to submit an appeal to the First-tier Tribunal. 

If you decide to appeal, you should provide a clear and concise statement of the grounds for your appeal, including any relevant facts and evidence. You can apply for funded legal assistance for dealing with any appeal against certain penalties. If you have health or personal circumstances that may make it difficult for you to deal with this matter, please inform the officer who contacted you.

In the case of appealing, you may choose to work with a professional advisor, such as an accountant or tax specialist, to handle the inspection on your behalf. If you work with a professional, they may be able to help you negotiate with HMRC and represent you in any further appeals or disputes.

How to prepare for a VAT inspection

To prepare for a VAT inspection, you should:

1. Keep accurate records: Ensure that you have all the necessary documentation, such as invoices, receipts, and bank statements.
2. Be honest: Be open and honest with the HMRC representative.
3. Be polite: Be respectful in your interactions with the VAT auditor.
4. Seek professional advice: If you are unsure about any aspect of the VAT inspection, seek advice from a professional, such as an accountant.
5. Be prepared: Review your VAT returns and business operations before the inspection to ensure that you are familiar with your records.

If you hire an accountant to work with you, then you may want to ensure that they are present to answer any technical questions the HMRC officer may have. 

Key takeaways

VAT inspections are a means of getting additional information about your business for the HMRC’s assessments, and they can be triggered for various reasons, including discrepancies in your information, high tax claims, or random selection. A VAT inspection will always entail a discussion surrounding the business operations and previous history with tax returns. The length of a VAT inspection can, therefore, vary depending on the complexity of your business and the issues being investigated. 

At the end of a VAT inspection, the HMRC representative will provide you with feedback and next steps. Should penalties associated with VAT inspection arise like interest on late payments, penalties for inaccurate returns, or penalties for failing to keep records, you should seek professional advice.