HMRC carry out many types of VAT checks, from verifying a single VAT period to unannounced visits to address areas of high risk. Here are some hints and tips how to prepare for VAT inspection and stay calm.
VAT repayments and inspections
Typically, VAT checks are either repayments (pre-creds) or routine inspections (compliance checks).
Single period checks are usually triggered by unusual VAT returns. The normal practice for businesses is to submit VAT returns with repayments due. However, if the total is extraordinarily high, a check might be requested. In the same way, a first return (repayment) and a repayment return filed by a business in payment position can trigger a response.
Various reasons can justify ‘routine’ inspections. There may be a specific risk associated with a particular trade sector, or perhaps the business has demonstrated unusual trading activity that may raise questions about its ‘credibility’. HMRC may also inspect businesses that are considered compliant to ensure that the risking process is working.
By performing a VAT inspection, HMRC can better understand your business. They will be in a better position to determine whether changes are potentially risky if they contact you and check your business records.
Hints and tips for VAT inspections
- Most VAT inspections will now be performed remotely with the closure of local offices around the country. Mobile officers may still be able to arrange an in-person visit if they are covering the area. Cities with HMRC Regional Centres are particularly affected.
- It is common for the VAT officer to ask questions about a business at the beginning of an inspection. It is likely that they will need to discuss business operations with a director or similar person, but the records checks can often be carried out with the accounts staff.
- If any errors have been identified in the records, they must be disclosed at the beginning of the meeting. Any disclosure made during a planned inspection will be ‘prompted’ for penalty purposes, but a quantified disclosure will maximise mitigation.
- The business should explain how the error occurred and how it is addressing and correcting any errors if there is one to disclose. In some circumstances this may lead to suspension of penalty.
- From the outset, the officer will feel more reassured if you explain all your business activities and sources of income. Should there be any uncertainty, it is best not to reply, but to request confirmation. If the initial fact pattern leads to an amount falling due to HMRC, it can be difficult to convince HMRC that the facts are incorrect.
- In cases where confidentiality reasons make overhearing conversations with the officer inappropriate, please let HMRC know. The inspection is likely to raise questions, so having a private space to discuss them is helpful.
- It is necessary for the officer to have access to accounts records for a period of up to four years. You will usually be asked to digitally transfer specified records in advance or after the meeting. Unless specifically trained, officers on site cannot use live systems unless they are specifically authorised. Set up a read-only access in advance and show the officer where the report functions are.
What records would HMRC look at?
An officer may request records to support the completion of a VAT return as part of a repayment or compliance check. During a check, the officer may ask for the following types of documents, but it does vary depending on the situation:
- VAT workings/summaries – these are a list of transactions for each VAT box. As a result, HMRC will be able to better understand what is included in boxes 1-9.
- Checking VAT invoices – sales and purchase invoices. Sales invoices without VAT and purchase invoices that are significantly higher than normal may be of particular interest to the officer.
- An officer may check bank statements (especially if a business uses cash accounting) to ensure all business income appears on VAT returns.
- A comparison of sole proprietor or company returns is necessary to ensure that there are no discrepancies.
Hints for repayment VAT return checks
- These types of checks usually result in repayment being withheld until HMRC is satisfied.
- Most of the time, checks can be performed remotely, by telephone or questionnaire.
- Prepare for questions that may be asked by the HMRC officer. VAT returns with unusual repayments or first returns are more likely to be selected for verification. Professional advisers can provide advice on any expected queries that may arise based on the data you provide to HMRC.
- Prepare a file with the most likely documents that will be requested if possible. As part of an initial check, the following items are often included:
– a copy of the VAT return
– top ten sales invoices
– top ten sales invoices (without VAT)
top ten purchase invoices
– C79’s and PIVA statements
– top ten reverse charge purchase invoices
– Exceptional transactions – if you purchased a property, be prepared to show a contract of sale, option to tax application, etc.
– The details of any corrections made to VAT periods in the past.
Keeping the above list handy will facilitate management checks of your returns on a regular basis. In case of a change in business profile or an unusual trading pattern, inform HMRC and provide supporting evidence if necessary.
You can also brief HMRC on future returns during this meeting. It is recommended to explain to HMRC that a new export contract means a greater proportion of its sales will be VAT-free, which will hopefully prevent any immediate follow-up questions.
HMRC is constantly re-evaluating risk and how to address it, whatever type of check they perform.
You shouldn’t be afraid to ask questions of HMRC officers, regardless of the check you’re conducting. As part of their duties, the officer may be able to update your registration details if necessary.
After the officer has completed the check, they should summarise their findings. There may be a need for further information to clarify something, or there may be an error (to either party’s benefit). It is a good opportunity to ask questions if the issue is complex or something the business is not familiar with. It may also be helpful to have a second person from the business present. It can be difficult for one person to absorb all of the information when there is a lot being shared. Taking contemporaneous notes is also beneficial.
Common errors
VAT compliance presents businesses with a variety of potential pitfalls. It is possible to avoid some types of errors by reviewing the business profile objectively and critically. Consider all sources of income, for example. In addition to the main activity, there may be sales to employees (including salary sacrifice schemes), canteens, tenants, or goods/services provided at a discount. Waste material or disposals of assets (which includes items part exchanged) can also provide income. VAT risks can be associated with all of these non-core activities. For goods dispatched overseas, it is easy to make the mistake of not keeping export evidence.
Invoices and tax points can cause errors – for example, if an invoice is delayed, the return may not be prepared. The control of ‘unreconciled transactions’ from previous periods is important.
Non-business expenditures should be excluded from purchases. Maintain proof of the checks the business conducts to confirm a supplier’s bona fides. A UK VAT number can be checked, for instance, via Check a UK VAT number. It can be helpful to take a screenshot to demonstrate that due diligence has been exercised.
How UK-Accountant can help
Generally, genuine errors can be resolved even when they are discovered. With an experienced team of VAT (including former HMRC VAT officers) and Customs specialists, UK-Accountant support businesses through this process. For any upcoming inspections or a VAT ‘health check’ to give you some reassurance, please contact Alison Lewis or your usual UK-Accountant contact.