VAT Inspections

Gary Green
Gary Green
April 11, 2024

VAT inspections involve HMRC visiting or contacting your business to carry out an inspection of its VAT records. The inspection involves compliance checks with the aim of ensuring the company is paying the right amount in VAT. Typically, businesses are informed before HMRC visits them in order to arrange the most convenient mutual time to perform the inspection but occasionally, they visit with no appointment or warning.

What Can Trigger VAT Inspections?

It is not possible to guess precisely what can trigger VAT inspections. Seemingly, they occur randomly but in fact they are usually associated with a trigger such as:

  • The business has failed credibility checks on at least one VAT return.
  • The business is operating in one of HMRC high-risk sectors.
  • HMRC has received information in relation to either your business or its VAT returns that it finds suspicious.
  • HMRC has noticed especially large VAT claim increases or claims for VAT where none existed before. The first company VAT return almost always triggers an enquiry when it reveals a net repayment.
  • You have previously had non-payment or late payment of VAT or penalties.

Are VAT Inspections Common?

How often a business will face VAT inspections can vary, so you cannot predict how frequently your business will be subjected to VAT investigation by HMRC. Usually, how frequently these inspections take place depends on the company’s VAT Return history or the business’s complexity or size.

How Far Into The Past Can VAT Be Investigated?

It is only possible for HMRC to inspect tax records dating back four years unless an inspection detects fraudulent activity. However, if HMRC suspects fraud, they can then inspect tax records dating back as far as 20 years. Nevertheless, VAT inspectors often only need to inspect a single VAT return in cases where they are verifying whether the company is entitled to have a VAT repayment.

How Long Will VAT Inspections Take?

HMRC inquiries into VAT can last varying lengths of time, depending on how long the inspectors need to determine an outcome.

Depending on how complex and large your business is, a VAT inspection may last between one and four days. Once the visit comes to an end, there may be further outstanding queries for you to answer, and you may need to supply further information. In such cases, you will typically have a 30-day period during which to supply the information requested.

Enquiries that identify no mistakes can result in the inspection being immediately concluded. Errors due to oversight or negligence may result in an inspection staying open longer. Should HMRC identify a mistake that it believes has been a deliberate effort at tax evasion, the resulting investigation could be quite prolonged, involving all of the company’s tax affairs being investigated in depth.

Can A Dissolved Company Be Investigated For VAT?

It is possible for HMRC to target a dissolved company for VAT inspection, even if it is no longer on the Companies House register if it believes that its tax affairs had errors. They can simply restore the organisation to the register before investigating it. It is important to note, though, that VAT investigations into dissolved companies typically only occur if an investigation is being carried out into other tax matters. Dissolved companies are rarely investigated unless a significant amount of money is involved or when the dissolved company’s directors are under investigation themselves.

What Will Happen If An Error Is Noted During VAT Inspections?

Depending on how big the error is and its nature you may be asked either to make adjustments on the next VAT return or, alternatively, you’ll receive an assessment. In such cases you will need to pay penalties and interest when appropriate.

What Will Happen When A VAT Inspection Is Over?

At the conclusion of the VAT inspection, HMRC will send you a letter to cover what needs to be done to improve VAT record keeping and any corrections that must be made to the VAT account. If VAT has been underpaid or overpaid, the letter will also include details about the penalty that needs to be paid.

Penalties And Surcharges

If a business has defaulted on its VAT returns, there may then be a surcharge period of 12 months during which any VAT error results in an additional surcharge being added as well as the amount of VAT owed. No penalty is levied for the first default, but any subsequent VAT returns or payments that are either not submitted or are submitted late, will result in a penalty beginning at 2% and potentially rising to as much as 15%.

Not only may surcharges be applied, but businesses may be charged penalties too. If an inaccurate VAT return is submitted by a business to HMRC (whether done carelessly or deliberately), the penalty charged may be as much as 100% of the VAT over-claimed or under-stated. Should the business fail to tell HMRC within a 30-day period that their VAT assessment is under its VAT liability, they may face a 30% charge. In cases where a paper VAT return has been submitted instead of an online one, it can be charged an amount between £100 - £400. In cases where the business fails to register itself for VAT at an appropriate time, a penalty will be issued depending on the amount of VAT due between the date it should have been registered and the date on which HMRC was notified. The penalty can range between 5% and 15%.

What Do I Do If I Do Not Agree With HMRC’s Assessment?

If you disagree with the assessment or the amount of the penalty that you have received from HMRC, you are able to write within a 30-day period to HMRC requesting a statutory review. Alternatively, you can submit your appeal to a First-Tier Tribunal. Statutory reviews are carried out by HMRC members with no connection to your case within a 45-day period. It is always a good idea to contact tax investigation specialists if you intend to take this course of action.

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