Updated: Nov 15, 2022
HMRC VAT inspections can take place at any time, potentially without warning. While no business wants to face the hassle and scrutiny, a VAT inspection isn’t usually a problem. However, if authorities detect irregularities in the course of an inspection, the consequences could be severe. To prevent potentially ruinous penalties, and minimise the likelihood of VAT inspections in the first place, it is critical that businesses have reliable and effective VAT compliance processes in place.
What would HMRC initiate a VAT inspection?
For many businesses, VAT inspections are relatively rare. Smaller businesses with a good track record of filing accurate and punctual VAT returns may never face an HMRC VAT inspection. However, there are a number of reasons why the UK tax authority, HMRC, may proceed with a VAT inspection of a business.
In some cases, HMRC may simply perform a random compliance check to ascertain whether a business’s VAT records are in order. Random inspections are more likely with large, complex organisations. However, this has become relatively uncommon. More frequently, a VAT inspection is triggered because HMRC detects potential irregularities.
In some cases, HMRC may be suspicious about the amount of VAT claimed. It is thus critical to have a domestic VAT system to manage all invoices and relevant supporting documentation to be able to demonstrate that VAT reclaim submissions are accurate.
HMRC may also inspect a newly incorporated business to assess whether it is assessing its VAT obligations correctly. In addition, if your business operates in an industry identified as high risk for VAT evasion, then you are more likely to face an inspection.
How often do HMRC do VAT inspections?
The basic factors that determine the likelihood of a VAT inspection will also affect the frequency of HMRC VAT visits. According to HMRC, the frequency of inspections depends on the size and complexity of your business and whether your company has previously submitted late or erroneous VAT returns.
To reduce the likelihood and frequency of a VAT inspection, businesses should therefore prioritize putting effective and reliable VAT compliance processes in place as well as make sure that VAT compliance requirements are met.
What happens in a VAT inspection?
HMRC will usually give notice before inspecting a business’s premises. You can also request a postponement on the inspection date. However, in unusual cases, HMRC may surprise a company with a spot inspection.
During the course of the visit, HMRC will examine your VAT records. This will likely include going over all your supporting paperwork. Bear in mind that VAT registered businesses have an obligation to keep comprehensive records for a specified time period.
Note that the inspection is not over when the HMRC officer leaves the premises. After the site inspection, authorities may request further documentation. HMRC will also provide a written notification indicating compliance improvements you may have to make or, if relevant, any penalty you have to pay.
How far back can a VAT inspection go?
Under normal circumstances, HMRC is authorised to assess four years of accounting records. However, if tax authorities suspect VAT fraud, they can inspect a company’s records going back 20 years.
A thorough investigation into historical accounting records is obviously particularly time-consuming and intrusive. It also raises another potential issue for the business under VAT investigation. If HMRC detects historical noncompliance, then additional penalties could be applied. These could amount to serious, even potentially ruinous, fines and interest charges.
How long do VAT inspections take?
In most cases, an inspection will only take a few days. If HMRC finds everything in order and the business operations are relatively straightforward, the HMRC inspection may only comprise a single day. Inspections at bigger or more complex businesses may take slightly longer.
However, if HMRC finds evidence of fraud, then they will likely initiate a thorough VAT investigation into the business. This will often be a lengthy and exhaustive process.
Note also, as discussed above, HMRC may request additional documentation once the onsite inspection is complete.
Can a business refuse to supply documents?
HMRC will work with a business to reach an agreement on supplying relevant documents. However, should the business and authorities fail to reach an agreement, HMRC may issue an information notice. In such cases, HMRC is entitled to issue penalties if a company neglects to supply the requested documentation.
What happens if HMRC detects irregularities?
If HMRC detects irregularities in the course of an inspection, the scale of penalties should reflect the scale of VAT non compliance.
A business may be asked to make an adjustment on its subsequent VAT return. It may also be subject to penalties and interest charges.
If a business fails to meet its VAT obligations, it may enter the surcharge period, during which additional charges are applied if a company continues to default.
Note that even accidental VAT non compliance can result in penalties. VAT registered businesses are obliged to take measures to ensure VAT returns are accurate and complete.
That said, deliberate VAT evasion is treated especially seriously. Evidence of VAT fraud will likely lead to very serious penalties, including possible criminal charges.
Can you appeal HMRC sanctions?
A business can write directly to HMRC and request a review of the initial HMRC decision.
You need to apply for a review within 30 days of the HMRC penalty decision.
If you are not satisfied with the outcome of the HMRC review, you can appeal to a tax tribunal. The appeal must be lodged within 30 days of the review decision.
VAT recovery - is it worth the risk?
An HMRC VAT inspection may be triggered if a company fails to submit VAT returns on time. Submitting erroneous returns is also a common reason why tax authorities may choose to inspect a business.
Given the risks associated with erroneous VAT returns, many businesses err on the side of being conservative about reclaiming VAT. This is understandable, as precisely calculating VAT owed to a business, and managing all the necessary supporting documentation, is complex and time-consuming. When managed manually it is also highly subject to human error.
However, neglecting to recover all VAT to which a company is entitled, increases the cost of business and impairs cash flow. Clearly, businesses will greatly benefit from knowing how to claim foreign tax credit and using a VAT recovery solution that maximises recovery and eliminates the possibility of error.
VAT IT’s technology-driven VAT recovery solution is designed to eliminate human error and reduce the administrative burden of VAT recovery, while ensuring you reclaim all the VAT to which you are entitled. From domestic VAT to foreign VAT reclaim, it’s a foolproof way to reduce the cost of business without the risk of penalties and intrusive audits.
Need help with VAT?
Book a free consultation with re:TRADE powered by VAT IT today, and select “Greater Manchester Chamber of Commerce” for the question “Where did you hear about re:TRADE?" for a special discount available for members only.
Wish for support in other areas related to customs, export and imports? Contact our Trade team at email@example.com