Help, HRMC has started a VAT inspection

Have you received notification of a VAT inspection from HMRC?

You’re not alone. Thousands of individuals and businesses are subject to tax investigations every year, and it’s not just limited to VAT. HMRC’s powerful internal software, Connect, scans through billions of records to identify discrepancies in Income Tax, self-assessments, company tax returns, and other related data.

So, if you’ve been picked, the likelihood is that the system has flagged an issue that needs an inspector to take a look. Or it could be you were picked at random – this is less common, but it does happen.

For most businesses, a VAT inspection is nothing to worry about, although, it can still be a stressful experience. In this guide, we’ll explain the process, how long it takes, and what happens if there’s a problem with your VAT, helping you to understand what to expect and how you can prepare.

Contents

• What is a VAT inspection?
• How likely is a VAT inspection?
• How far back can HMRC go?
• What’s the VAT inspection process?
• How long does a VAT inspection take?
• VAT inspection penalties.
• How to prepare for a VAT inspection: Our four top tips
• FAQs.

What is a VAT inspection?

A VAT inspection, also known as a compliance check, is a review of your business records to make sure you’re charging, recording, paying and reclaiming VAT correctly.

Fraud and evasion cost the UK government billions in missed tax revenue each year, with HMRC’s official figure of £5.5 billion thought to underestimate the size of the issue. So it’s a major problem for HMRC to crack down on.

Don’t worry, if your business is flagged for inspection, it doesn’t mean you’re intentionally defrauding HMRC. It doesn’t even necessarily mean you’ve done anything wrong. And even if you have, most of the time it’s a simple, accidental, mistake.

But if you’re wondering why you’ve been picked out, then there are several possible reasons:

• Inconsistencies or errors spotted in your VAT returns.
• Sudden or unexplained shifts in your turnover that stand out.
• Repeated late payments or irregularities in your VAT submissions.
• HMRC’s smart software, Connect, might flag your business if something doesn’t quite add up.
• One of your suppliers or customers is being investigated.
• HMRC received a tip-off about non-compliance.
• Occasionally, businesses are chosen completely at random (though this isn’t too common).
• By far the most common reason is that a business has submitted a large or unexpected repayment claim.

How likely is a VAT inspection?

Unfortunately, there’s no definitive answer. It’s difficult to say how likely a VAT inspection is. Some businesses can go a lifetime without an inspection, while others are inspected every other year.

There are some factors that increase your likelihood, though. For example, if you operate in sectors with higher inheritance VAT risks, have irregularities in your records, have complex VAT returns, or have a history of non-compliance. But, generally, if you’re a small or medium sized business with a fairly simple business structure, and you keep your records tidy, accurate, and timely, your chances of being selected are relatively low.

How far back can HMRC go?

HMRC can inspect your VAT records covering the past four years. However, if there’s suspicion of careless mistakes or intentional wrongdoing, they can go back up to 20 years, especially in cases of fraud.

If you have an inspection booked, we recommend ensuring your records are available for easy inspection so it’s simpler for HMRC to find the information they need.

What’s the VAT inspection process?

Knowing what to expect can make a VAT inspection feel much less daunting. There are three main stages: a pre-visit notification, the actual visit, and a post-visit follow-up.

Pre-visit

To start, HMRC will notify you about the inspection. This is usually through a phone call, but please be careful – avoid handing out any details over the phone in case it’s a scam. HMRC will already have all of information they need and will not ask for any personal details.

The phone call is simply to explain the reason for the inspection, how long they expect it to take, and to arrange a convenient date. You can ask to delay, if you wish.

Following this phone call, they may send a follow up email to specify particular VAT periods or records they want to look at – this can include annual accounts – they may request you send these records prior to any premises visit.

In rare circumstances, HMRC will skip this stage and turn up at your business premises unannounced. This is highly unlikely for most businesses and would indicate that HMRC suspect fraud.

Visit

On the agreed date, an HMRC officer will visit your premises to review your records in person. They will want to speak to a director or authorised person about the business – its activities, premises, customer base, imports/exports, business assets (including vehicles) and how bookkeeping is dealt with. They will usually specify several returns they want to focus on so you may not need to have everything on hand.

Expect them to focus on areas such as:

• Your sales invoices – checking that VAT charges are accurate.
• Your purchase invoices – to verify VAT reclaims.
• VAT returns and how you’ve calculated them.
• Your business bank statements for transactions matching your VAT reporting.
• General accounting and cashbook records to ensure everything matches up.
• Your recording processes.
• Annual Accounts – these will be compared to what has been shown on your VAT returns so, if there are any differences, they are likely to question these. Your accountant may have already reconciled the VAT returns to your turnover figure and can provide this information.
• If you are involved in exports, they will also want to ensure you hold the correct evidence that the goods have left the UK.
• If you have purchased a property or are undergoing a major project, they may want to see associated documentation in connection with this, e.g. funding.

Post-visit

HMRC will write to you with their findings. If everything is satisfactory, that’s the end of the matter.

If they find any issues, you should receive clear guidance on:

• Improving your record-keeping processes.
• Corrections to your VAT account.
• Whether you’re under – or overpaying VAT.
• Penalties you’ve incurred.

How long does a VAT inspection take?

HMRC will tell you how long they expect an inspection to take during the pre-visit phone call. The usual guidance is one to four days, but it could be longer for bigger, more complex businesses.

It could also be much longer if HMRC find evidence of clear wrongdoing during their initial visit. They may launch a deeper, longer investigation, which can last several months. At this point, you may benefit from the support of a specialist in VAT fraud investigations. That’s something our team can help with.

VAT inspection penalties

If HMRC finds an issue with your VAT records, there is a sliding scale of potential penalties. Each penalty has a % range, if a business does not give enough assistance in the enquiry (not having records available or refusing to produce documents, taking an inordinate amount of time to produce them etc.) Any penalty will be nearer the higher end of the range.

A ‘lack of reasonable care’ penalty can be suspended for a period of time if and you set and agree conditions to ensure the error does not recur. If you meet these conditions, the penalty will then be withdrawn.

The penalty rates become harsher if you try to hide an issue, so being open and transparent from the outset of an inspection can save you money in the long run.

How to prepare for a VAT inspection: Our four top tips

We asked our tax investigation team for their five top tips for businesses facing a VAT inspection. Here’s what they came back with:

1. Be proactive. If you spot an error or realise you’ve made a mistake, don’t wait for the inspector to find it. Submit a VAT652 form to HMRC. This not only demonstrates transparency but can also significantly reduce any penalties you might face.
2. Keep your VAT returns timely and accurate. The best defence against an inspection is prevention. HMRC only has limited resources (although they are hiring 5,000 more inspectors), so they’re less likely to open cases against businesses that consistently submit accurate VAT returns and make punctual payments.
3. Be organised. Clear, easily accessible records help demonstrate professionalism and make an inspector’s job easier (remember, just like anyone, they want an easier day at the office). Get your invoices, receipts, bank statements, and previous returns neatly filed and ready to review.
4. Consider professional help. If you’re anxious about dealing with HMRC, a representative can step in. For example, your accountant. They’ll handle communications, prepare documents, answer queries, and negotiate on your behalf if required. This can save you time and stress, but it also means the matter is being managed by a professional with prior experience in VAT inspections.

How to prepare for a VAT inspection: FAQs

Can HMRC investigate a dissolved company for VAT fraud?

Yes, HMRC can investigate dissolved companies for VAT fraud. Generally, they have six years from the date of dissolution, but this can be extended to 20 years in cases of fraud. First, HMRC must apply to the courts to reinstate the company, and the investigation proceeds from there. If you are the owner or director of a dissolved company that HMRC is looking at, please contact our team. There are potentially severe penalties (including fines and disqualification as a director), so it’s best to seek professional advice from our specialists.

Is there any financial protection available for companies under inspection?

Yes, there are insurance policies available to cover the cost of professional fees during a tax investigation. These policies do not tend to insure against potential penalties, but rather the fees associated with your accountant or solicitor when dealing with the enquiry.

Need support with a VAT inspection?

With a history stretching back over 80 years, our VAT advisers have guided thousands of businesses through VAT inspections over the years. Our team consists of ex-HMRC inspectors, meaning we know what HMRC is looking for.

We know that an inspection is a stressful time. It can pull you away from more important matters and harm the day-to-day running of your business. To help, we can manage the entire process on your behalf, freeing up your time and giving you the peace of mind that it’s all in safe hands.

To get started, contact us today by filling in a form or calling +44 (0)20 7299 1400.