The powers VAT be – The Xeinadin VAT inspection survival guide

In this article we answer your VAT inspection questions: What powers do VAT inspectors have? What triggers a VAT inspection? What can you expect in an inspection? What are the possible outcomes? Can you appeal?

HMRC performs thousands of VAT Inspections every year, which can be extremely disruptive, stressful and expensive for the owners, managers and staff involved.

Just the letter from HMRC arriving in the post, can send a chill through the best-run company. But it doesn’t have to. Xeinadin can help ensure you’re in good shape for any future inspection, and even reduce the likelihood of your company being singled out.  

But first, let’s start with the basics:

What is a VAT inspection?

HMRC inspectors visit the premises of a business (or their accountant’s office) to review the financial records, usually for the last 4 accounting periods (that’s years, not VAT quarters).

Why is your business being selected for a VAT inspection?

A VAT inspection can be triggered by a number of things. Some industries or trades (e.g. construction firms, restaurants, shops, hair and beauty salons), can be more susceptible to VAT inspections than others, as HMRC consider that they have more VAT issues.

From time to time, HMRC will also run campaigns targeting specific industries and you may be simply unlucky to be one of these.

However, there may be more defined reasons why you’ve been singled out. For instance, it could be that:

1. One of your suppliers or customers has had a VAT inspection and HMRC have highlighted some issues which may apply to your business.
2. You’ve submitted your VAT return late, or incorrectly.
3. HMRC have had a tip off that they wish to investigate further – although they’ll never say so specifically.
4. Your business has recently registered or deregistered for VAT and HMRC wish to review whether records are being (or have been) properly kept.
5. HMRC has seen a discrepancy on your Tax Return (this may be for Corporation Tax or an individual’s Self-Assessment), and have noted a variance in respect of your VAT returns.

Nevertheless, you might still get a visit if you’ve done everything by the book. How often HMRC visit you can largely depend on the history of errors and the size and complexity of your business.

Pre-credibility checks

Since 2020, HMRC has adopted the tactic of Pre-Credibility Checks. These are, in effect mini inspections, that usually happen when a business submits a VAT return that shows they’re due a refund.

The stated purpose of these checks is:

1. To verify that you are genuine.
2. To identify potentially false or inflated VAT claims; and
3. Specifically, to root out claims made using agents who specialise in submitting large volumes of false claims (the contractor/sub-contractor industry is a specific target of this stratagem).

If the amount reclaimed is above £50k, HMRC’s system will automatically stop the return and raise a pre-credibility check. Usually, they’ll only ask to see details from that specific VAT return. However, if they review and find things that are wrong, they’ll empty the whole can of worms out onto your desk and escalate it to a full inspection.

Given that many taxpayers have had problems with this system (including Pre-Creds triggered by claims for just a few hundred pounds and one notable case where HMRC has withheld a verified refund of £77,000 since November 2021), it is clear that it has some flaws. Our best advice, if you’re looking to send in a return with a refund request, is to get in touch with your Xeinadin partner beforehand. We can offer advise on the best way forward.

Is there any warning of a VAT inspection?

Yes! If you’re due for an inspection, you’ll receive either a phone call or a letter from HMRC, giving you a week’s advance notice. They’ll also confirm what records they want to see and whether or not they wish to inspect your business premises.

They’ll usually want to see a detailed VAT report showing each input and output VAT transaction from the last 4 years. They’ll likely also pick a random sample of purchase invoices and sales invoices to review. This can take few hours, or more, depending on the size of your business.

Once they are finished, they will notify you of their findings and offer a chance to provide any further explanations.

What are the potential outcomes at this stage?

The inspectors will report one of the following:

1. Everything they’ve reviewed is fine and they have no further questions.
2. They need more information. Perhaps there may be some purchase invoices that they couldn’t find.
3. They have questions about a specific invoice.
4. They’ve found an error on an invoice.
5. They’ve found a discrepancy and will give you a deadline to provide an explanation.
   

Even though HMRC may find nothing as a result of their inspection, it does not necessarily mean that the business has been given a clean bill of health. Therefore, it is always important to keep a record of what HMRC reviewed, what was discussed, and any comments made as regard to liability treatments and supply chains.

There are often cases in the courts where a taxpayer has had an inspection, however, is later assessed for a VAT error that was not noted at the time of the visit. Therefore, a business cannot use the results of an inspection as an excuse for errors.  

How to survive a VAT inspection – Ask Xeinadin to bring the inspection onto your own terms

A week’s notice of an inspection, in a busy business, can be hugely disruptive. If it’s going to cause you a major problem, Xeinadin can help. We can contact HMRC directly on your behalf and ask them to delay on the grounds that you need additional time to gather all of the records they need (for instance, if they’re in storage). Or we can request that they conduct the inspection at your local Xeinadin office. Which is much less stressful than having a VAT inspector turn up at your premises where your customers, suppliers, and employees will be able to see what’s going on.

In our experience, VAT inspectors are keen to cooperate with businesses and will try to schedule the VAT inspection at a time and location that’s convenient for you, within reason.

At Xeinadin, we support our clients in managing their VAT affairs effectively, in a range of ways. For example, our accountancy teams will analyse the VAT data, prepare the VAT return and submit it on your behalf.

In addition, when VAT gets more complex, we have an in-house VAT specialist team that can provide tailored advice and in depth guidance to help you respond to any challenges arising from an inspection.

Be honest and up front from the start

We all make mistakes. Sometimes businesses claim VAT in error, or don’t charge VAT on a sale when they should have. If you discover such an error when you’re preparing for the VAT inspection, the approach to take may well be influenced by the scale of the potential VAT at risk. It is important to consider all of the implications of making a disclosure and to take advice from Xeinadin. We can guide you forward.

There may be penalties and interest that are charged in addition to the error (assuming that it is in HMRC’s favour), however, the penalties can be mitigated if you are able to show that you have taken reasonable care, which includes, taking advice.

If they do find a mistake that you knew about and didn’t take advice on or disclose, the penalties can be much higher, and HMRC’s ability to suspend penalties is reduced.

Get adequate VAT insurance

The amount of time it will take your accountant to prepare for an inspection, be on hand while it’s going on and follow up on your behalf, can be considerable. Even if you come off lightly from the inspection, you don’t want a huge bill at the end, so talk to your Xeinadin partner about getting adequate insurance to cover the costs of dealing with challenges arising as a result of the inspection.

Adopt online accounting

The preparation and submission of VAT returns is now governed by the Making Tax Digital requirements. If your business hasn’t done it already, installing accounting software can revolutionise your business, as well as ensuring that you meet these mandatory digital requirements.

Xeinadin’s software team can help you choose the right platform for your company, help set you up, and give you expert ongoing management and support.

Follow up quickly

If the VAT inspector does ask for any explanations, or follow-up information, do try to get it to them promptly. This will stop the inspection from dragging on and can help to avoid any penalties. It is important that HMRC feel that you’re cooperating well with them, as it could reduce the risk or value of any financial penalty.   

Promptly implement any suggestions the inspector makes

HMRC will usually identify some aspect or issue that they feel your business should address. This doesn’t necessarily mean they think you should be punished or penalised, but it’s advisable to take note of the issues they raise and implement their recommendations. However, we would strongly recommend that you always ensure that their comments and suggestions are accurate. Xeinadin can help with this sense check.

Can you appeal?

If you’re not satisfied with the outcome of a VAT inspection and have received a VAT bill, you have the right to appeal for local reconsideration and then can progress higher to an independent VAT tribunal.

You must lodge the appeal within 30 days of the review decision. If you find yourself in this position, get in touch with your Xeinadin partner as soon as possible, and we’ll assist you by providing guidance and help with the appeal process.

Use Xeinadin pre-emptive auditing to protect your business from HMRC inspections

Regardless of how prepared you are or how well you adopt the above measures to survive a VAT inspection, if your business is VAT registered, the chances are, you will be inspected at some point. And we can help you stay vigilant!  

By using Xeinadin’s VAT accounting service, the risks associated with a visit can be greatly reduced. As veterans of decades of interactions with VAT inspectors, there’s nothing we haven’t seen and there are no surprises where we’re concerned. Therefore, we’re best placed to ensure you’re in good shape for an inspection.

If you’d like to discuss how Xeinadin’s VAT accounting services or, our specialist VAT technical team, could help protect your business against potential VAT errors arising from future HMRC VAT inspections, please get in touch with your Xeinadin partner to open a discussion.

Our VAT specialist team can be contacted via the form below. Don’t forget to sign-up to our tax and VAT updates too and be up to speed with the ever-changing world of VAT.