Dealing with VAT Inspections

Most of us are used to routine VAT inspections. But if it is your first inspection, whether as a sole trader or FD of a large group, an impending VAT inspection can be somewhat daunting. Even experienced accountants can be wary if they are concerned about the business’s compliance history or if the accounting records aren’t as good as they should be.

Here are some simple guidelines for dealing with inspections, whatever your situation.

How, when and why?

Very large businesses have allocated VAT officers who visit their traders several times a year, perhaps for several days or even weeks at a time. But most visits are allocated based on a number of criteria, including the size of the business and the complexity of the business.

The primary purpose of routine visits is to ensure that the business is accounting for the right amount of VAT at the right time. It doesn’t mean that they will verify every single transaction but they will be ensuring that the accounting system is sufficiently robust to ensure that the VAT returns are correct and can be supported by the accounting records

The other reason that an officer visits is that there is a query of some kind, most commonly when the business has submitted a repayment claim and HMRC needs to verify that the claim is correct.

A few practical points about the visit itself

  • Be prepared. Have the right people and the right information available. If the officer has asked in advance for particular information or records, have them ready and ensure that a partner or director or other senior person is available to speak to the officer and deal with any queries.
  • Be co-operative and polite to the officer. Give them some decent accommodation and be close by in case they have any questions. And a decent cup of tea always helps.
  • As well as the day to day accounting records, always have copies of recent annual accounts and bank records available.
  • Make a note of anything discussed during the visit and ask the officer to confirm any specific points in writing, eg rulings on liability issues or business/non-business apportionments. Alternatively, offer to write a note of the documents reviewed and the issues discussed and ask the officer to sign to show that he agrees with it.

And on the technical side

  • Expect the officer to concentrate on any non-standard technical issues, for example your partial exemption calculations if your business is partly exempt or VAT liability issues if you are a property development.
  • Remember that almost every time, the VAT officer will carry out routine checks to ensure that the right amount of tax has been declared. Sales and purchase ledgers, annual accounts and bank records are the basic records that should be available for inspection and up to date.
  • Even if the accounts aren’t as tidy as you’d like and you can’t reconcile every entry, the officer probably won’t be too concerned unless the errors suggest that the VAT returns could be wrong, for example if there is more income in the bank accounts than reflected on the sales invoices.
  • It’s important that the client understands the importance of good compliance and this includes keeping accounting records up to date and in good order.
  • Remember that one of the most common sources of VAT assessments is from routine issues such as VAT on car expenses, staff entertainment and business/non-business apportionment.
  • And finally, remember that even if the officer doesn’t find anything wrong, it does not mean that everything is right. And even if the officer does find something wrong and issues an assessment for one or more errors, it doesn’t mean that everything else is okay.

Compliance issues

In the past, many businesses and even some accountants turned a blind eye to repeated compliance errors, especially those that didn’t affect the actual VAT liability of the business or cost anything in terms of penalties or interest. But nowadays this isn’t such a good idea.

The new penalty system is designed to impose errors when the tax itself is wrong. However, penalties can be reduced according to a number of factors, including if the business has a good compliance history. Repeated errors which the business ignores will normally be taken as a sign of carelessness and a factor in whether or not to suspend penalties when VAT errors do occur. This could include anything from consistently overclaiming input tax on expenses to getting the boxes 8 and 9 figures wrong.

So a little attention to compliance now could save money by reducing penalties when most needed.

HMRC Guidance

HMRC have produced some very helpful guidance here http://tinyurl.com/m6zedu on their website about VAT visits and it’s worth reading through this if you think that you need any further information about the subject.