Preparing for a VAT inspection

In days gone by, a popular tactic for dealing with a VAT inspection was to make it as uncomfortable for the inspector as possible, hoping that they would get fed up and leave before finding anything wrong.

However, this approach is not to be recommended. Taking a little time to understand the VAT inspection process and to prepare properly can make the visit less of an ordeal for everyone involved.

Before the inspection

In many cases, the first that you will hear about an inspection is the dreaded letter through the door with a date for the visit and a long list of records that the officer wishes to inspect.

HMRC are entitled to (and normally do) ask to see all of your business records for the last three or four years (in fact they must be retained for six years). These include your financial accounts, bank statements, sales and purchase invoices, VAT account and possibly other records, depending on the nature of the business.

First of all, don’t panic! VAT inspections are perfectly routine and the inspector will not be trying to catch you out.

Once you have the name of the visiting officer, it is worthwhile contacting them before the visit to confirm the timing and scope of the inspection.

If the suggested time is not convenient, it is perfectly acceptable to request to rearrange it (although they won’t be put off forever!).

It is reasonable to ask whether there is anything specific that they wish to look at and this should help you to focus on any particular areas of interest for the officer. HMRC are increasingly moving towards ‘risk-based’ auditing of businesses, meaning that the visit will often have been triggered by something specific. It may be that the last VAT return figures did not fit their normal profile (for example if the business has recovered an unusually high amount of VAT on refurbishing its premises).

Sometimes, HMRC will wish to focus on a specific aspect of the VAT accounting process, such as the accounting system, or cross border transactions.

If the purpose of the visit is to review a very distinct issue, such as an unusually high VAT credit and this has a straightforward explanation, then it may be possible to avoid the visit altogether by sending the relevant invoices to HMRC together with an explanation.

Assuming the visit does go ahead, it is also worth agreeing exactly what records the officer wants to review. If three years’ worth of invoices would be enough to fill a barn then it is acceptable to ask whether a smaller sample can be provided, for example, the invoices for one VAT quarter. Alternatively you could offer to provide a spreadsheet of the invoices in the first instance and then follow up with copies of any specific invoices that HMRC wishes to see. In any event, once it has been agreed what records will be made available, make sure they are there on the day.

It is highly recommended to review your VAT accounting before the inspection and it can be worthwhile getting professional help to ensure that you are fully prepared. If any errors are found before the inspection then you should quantify these and disclose them to HMRC as soon as possible. You should also advise HMRC of the steps that have been taken to ensure that the errors are not repeated. Prompt and full disclosure can often help when trying to reduce any penalties that may be due.

It is also worth reviewing any previous correspondence with HMRC to ensure that any earlier issues have been dealt with and any instructions from HMRC have been acted upon.

On the day

You should ensure that someone is available who can explain to the VAT officer what the business does and how the VAT return is put together. You may wish to have a VAT adviser present, particularly if the business has complex or contentious VAT affairs. However, this would not normally be necessary for routine visits on straightforward businesses.

If the officer asks questions that you don’t know the answer to then don’t guess. It is much better to follow up promptly in writing once the facts are known. However, it is important not to be evasive, as full cooperation can help to reduce any penalties.

It is often useful to have a ‘wrap up’ meeting to allow you to discuss any concerns that the officer has and to provide any additional information. However, you may still be none the wiser as to whether any issues have been found, as the officer may have to go back to the office to do additional research before reaching a conclusion.

After the inspection

It is important to follow up on any questions from HMRC promptly and accurately. If HMRC have any concerns, they may request further information, or issue an assessment for underpaid VAT (don’t expect them to highlight any overpaid VAT).

If you receive such a demand then don’t ignore it. HMRC can get things wrong and may not be aware of all of the relevant facts. Do not miss the deadline for responding, as this can limit your right to appeal. It is often worth obtaining professional advice at this stage so that if HMRC have misunderstood the facts or the VAT rules then this can be addressed before their views become set in stone.

If your preparation has paid off and HMRC have not found any issues then they will not necessarily confirm that fact.

Steve  Henshaw, Director of Indirect Tax for Ernst & Young LLP