Everything You Need To Know About VAT Inspection and Penalties

January 10, 2019

Every year HMRC sends out thousands of letters to businesses informing them of an upcoming VAT inspection. For busy business owners, this can cause significant disruption and worry.

However, if you know what to expect from HMRC and you prepare for the visit, you can complete a VAT inspection quickly and without too much fuss.

In this article, I’ll do my best to explain the ins and outs of a VAT inspection and will also give you some preparation advice.


When do I register for VAT?

Businesses under the VAT threshold (currently £85,000 taxable turnover per year) do not need to charge VAT to their customers, although they can voluntarily register and charge VAT.

Once your business breaks the VAT threshold, you are legally required to register for VAT. Registered businesses can also reclaim the VAT they paid on goods and services they purchased.


What is a VAT inspection?

The overarching purpose of a VAT inspection is to check if you are paying or reclaiming the correct amount of VAT. While HMRC used to use inspections to audit VAT records at random, this is no longer the case.

Nowadays, VAT inspections are triggered by HMRC risk assessments. These assessments consider a wide range of factors, including:

  • Comparing your annual accounts figures to the VAT return figures
  • Sales and/or purchases figures for your business obtained from third-parties such as Just Eat or some suppliers
  • Credibility checks (comparing your submitted figures to average rates of VAT for the type of industry you operate in)
  • Risk of your business sector
  • Tip offs or other reported information
  • Change in level of VAT repayment
  • History of non-payment of VAT

More often than not, VAT inspections are targeted on businesses where HMRC already has suspicions. As such, HMRC officers will often go in with the expectation that the business owes money.

During your inspection, HMRC officers will inspect your VAT records and day to day business records, including purchase books, till rolls, invoices, bank statements, annual accounts and more. They may also request access to accounting software like KashFlow or Xero.

Unfortunately, many businesses will struggle to furnish HMRC with complete accounting records. This often leads HMRC officers to raise an assessment showing an exceptionally high amount of unpaid tax. In these situations, it’s down to the business to prove that HMRC is incorrect. Sadly, this is something we see fairly often with our clients.


What should I do if HMRC is inspecting my business?

If you receive a letter from HMRC alerting you to an upcoming VAT inspection, the very first thing you should do is review your accounting records. If you aren’t able to do so, I strongly recommend asking your accountant to review them for you.

Ideally, your accounting records should be reviewed and any improvements or corrections made before HMRC’s officers arrive.

It’s also worth considering appointing an accountant to help you prepare for the inspection more widely. A suitably qualified and experienced accountant will be able to help you assess your accounting processes and suggest any improvements.


What are the penalties?

At the end of your inspection, the visiting HMRC officers will arrange a meeting to discuss their findings. This will cover any issues or concerns they uncovered during their time with your company.

The officers will reiterate their findings in a letter, which will also include:

  • Procedural suggestions for your VAT records
  • Corrections to your VAT account
  • Notification of underpayment or overpayment of VAT
  • Any penalties for non-payment

If the officers discover any serious problems during your investigation, they can issue fines of up to 30% of the underpaid VAT.

The ultimate penalty for any business is for HMRC to petition the court to appoint liquidators. As I have mentioned in several other articles, HMRC can do this substantially quicker than other creditors so pay close attention to all communication. In particularly serious cases, HMRC can also pursue action against the company’s directors personally.


What should I do if I can’t pay?

One of the problems with VAT inspections is that HMRC requests payment immediately after the conclusion of the investigations. However, most businesses will have already spent the money that should have been sent to HMRC. If the investigation covers several years of underpayment, this can be a significant amount of money.

While there are options available, you usually require an experienced and qualified professional to negotiate on your behalf. For more information, please see our blog on negotiating with HMRC.

If your business already owes debts to HMRC and you are worried about your ability to pay, please get in touch with our team for free initial advice.

Generally speaking, the longer you leave it, the less likely HMRC will be to agree to any proposals. So click here to talk to a member of our team today.

Professional Indemnity Insurance – our professional indemnity insurer is Mapledown Royal & Sun Alliance plc , Mapledown Underwriting LLP, The St Botolph Building 138 Houndsditch London EC3A 7AG and policy number is RTT262119/11273. The territorial coverage is worldwide (excluding professional business carried out from an office in the United States of America or Canada) and excludes any action for a claim brought in any court in the United States of America or Canada.


GLASGOW LIVING WAGE EMPLOYERBarry John Stewart and George Dylan Lafferty are authorised to act as insolvency practioners in the UK by the Institute of Chartered Accountants of Scotland. Company Registration Number SC 477598 | VAT Registration Number 192 5146 03 | Data Protection Registration A1056203 | FCA Registration Number 766693 | Registered office: 2nd Floor Suite 148, Central Chambers, 11 Bothwell Street, Glasgow G2 6LY.