Key considerations for a VAT inspection

In the lead up to the 2024 General Election the Labour Party committed to an increase in HMRC officers over the life of the Parliament. They would add 5,000 additional officers to the existing cohort, the focus being on identifying additional tax – estimated at some £5bn – by application of more enhanced compliance checks.

One potential result of this would be an increase in the number of VAT inspections. The current trend of ‘virtual’ inspections is likely to be reinforced by more ‘in person’ inspections. Price Bailey’s VAT partner, Greg Mayne outlines some useful tips and reminders on how to deal with VAT inspections.

1. Find out why HMRC may want to inspect the VAT records of your business

There are several reasons why HMRC might want to inspect the VAT records of a business, so it would be perfectly reasonable to ask what might have triggered this. It could be purely routine – generally, registered businesses are given a kind of ‘score’ depending on a combination of factors, including business sector, tax performance, turnover, compliance history, etc., so the reason for the visit might just be because the computer says so, or it is time for a visit. There are other reasons for a visit – for example an unusual, or unexpected, repayment (or perhaps payment), or information from an external source that needs to be clarified and confirmed. HMRC may have concerns about the legitimacy of the business so may make an unannounced visit.
There may not be a full response given when the reason is requested, but it can help to ask.

2.  Right people, right place, right time

It is extremely unlikely that the visit will take place unannounced (unless there are other, extenuating, circumstances for this to be the case – see above), so there should be ample opportunity to ensure that the visit is at a convenient time, at a preferred location (*), and that the right people – with the right records – will be available to assist the officer with the inspection. It is not always essential to have professional advisors attending the visit, in fact this may come across as slightly suspicious if an officer carrying out a purely routine inspection is greeted by a team of external accountants and tax advisors.

(*) for a first visit the location is usually required to be the business premises. Subsequent visits may take place elsewhere, for example at an accountant’s office.

3. The usual comforts

Whilst it might cause some concern and anxiety to have an inspection, the officer is just doing their job, so making sure that they have somewhere reasonably comfortable to work, with ‘normal’ hospitality such as tea, coffee, access to toilets, etc. would be expected. If this is not provided then the officer may decide to remove records to take them to somewhere more convenient or comfortable, and this can cause some disruption to the business, so it makes sense to ‘be nice’. Having said that, being ‘overly nice’ might cause some concern or look suspicious, so don’t go over the top.

4.  Answering questions

Particularly for a first visit the officer will want to find out about the business generally, which might include a tour of the site and seeing how the business works. Questions should be answered honestly and openly but if there’s anything that you’re unsure about, or something that you feel may not be within your ability to answer, then it is perfectly acceptable to delay providing a full response until you are sure. That might be later during the visit or once you have referred and checked with others. You don’t have to commit to answering everything at the same time.

5.  Make the most of it

One criticism often levelled at HMRC – particularly in the past couple of years – is the lack of access to information and guidance. Having an officer on site can provide an invaluable opportunity to ask relevant and pertinent questions about your businesses tax position. The officer may not be able to provide a full answer or act on any request at the time of the visit, but you will have their details and can follow up with them to ensure that you get the issue addressed. This might be checking the liability of a supply, for example, or asking advice on a process such as importing goods for the first time.

6. Don’t close that down…

Having made sure that the right people and records are available for the visit, it is important that you check with the officer before you remove any records, close down any programmes, or key people become unavailable.

7. Keep a note

Where any specific points are raised, or advice is given, the officer should be asked to provide a summary in writing, but it is worth making a note at the time and ensuring that you have understood what is being discussed, as it can be more difficult to try and clarify at a later date.

8. Don’t panic!

As mentioned previously many VAT visits are purely routine with no ‘trigger’ other than it being time for a visit to be carried out. If you have taken prudent steps to ensure that you are up to date with VAT legislation and obligations, and you have remained compliant with those obligations, then there should be little reason for any anxiety. It may well end up that the visit results in your business being more efficient and your concerns and queries can be addressed directly.

9. Get ahead of the game

Any errors or disclosures that are deemed to be made “under the shadow” of a VAT inspection may attract penalties, as HMRC will take the view that they would not have been discovered or divulged had it not been for the inspection taking place. It can therefore be beneficial to carry out regular checks on VAT performance to avoid the potential for penalties to apply.

10. Protect yourself

Most accounting firms will provide insurance services and fee protection schemes that will assist in covering fees that might be incurred in dealing with the fallout from a VAT inspection, such as additional research, data retrieval, and liaison with HMRC. These products can be effective in providing a necessary safety net should an inspection reveal any issues that require that additional resource.

If you have any immediate concerns, are currently under investigation, or require any other VAT guidance, we strongly recommend contacting our team for advice using the form below.