Business Insight

Top 7 tips for a vat inspection

The words “HMRC would like to come and do a vat inspection” for one of our clients are enough to spark a sense of dread in even the most seasoned veteran business owner.

However, it doesn’t necessarily have to be this way.  For a start before we get into our top tips on how to handle a vat inspection, you have to address 2 key questions:

  1. What exactly is a vat inspection?
  2. Why am I getting a vat inspection?
  • What exactly is a vat inspection?

We’ve been helping clients with plenty of vat inspections over the years and basically they are a visit to either the client’s premises of business or our office where the HMRC vat inspector will review the books and records of the business, usually covering the last 4 years of the businesses accounting periods. 

The vat inspection always begins with either a phone call or a letter from HMRC to say there is going to be a vat inspection and what records they will be reviewing.

We usually request that the vat inspection is done on our office as this means less hassle for the business owner as they don’t have to miss a whole day’s work and can keep their mind off it.  Sometimes the vat inspector has requested that the business owner(s) are there with us initially for a chat to run through some general questions about the business

HMRC will usually want to go through the vat detail report, that shows all the output vat & input vat transactions individually, from the last 4 years and then when that is finished, they will pick a randomly selected sample of purchase invoices or sales invoices to review first hand. 

We’ve helped clients with vat inspections with manual records before where the client has brought all their accounting records to our office, and we have literally boxes and boxes of invoices stacked up in a room for the vat inspector to pore through.  However, more recently with our clients moving onto cloud accounting software – Xero and Receipt Bank, we have helped clients with vat inspections where all the invoices are stored digitally and we can quickly search for invoices that HMRC has requested on the day and have them presented in a matter of minutes. 

After all the reviewing the information and vat detail reports which can take a few hours, we will then meet with the vat inspector to discuss their findings from the information that he/she has inspected on the day.

It is at this point that either one of the following can happen:

  • There is more information that they need, for instance a purchase invoice that they couldn’t find
  • Or they have specific queries relating to an invoice that they need our help with
  • They have found an error on an invoice – sales invoice calculated incorrectly for example
  • Everything they have reviewed is fine
  • There is a discrepancy that requires follow up explanation from the client which we will need to provide by a specific date

That’s really the main points with getting a vat inspection, now we will look at why you are getting a vat inspection.

  • Why is the business getting a vat inspection?

This can be a difficult question to answer sometimes as the reasons are unclear, however in our experience there are several reasons why a vat inspection has been requested:

  1. The specific trade of the business – some trades/industries are more prone to vat inspections than others as they have more risk from a HMRC point of view and have a lot more vat issues – eg. Shops, restaurants, construction industry, hair/beauty salons.

HMRC runs campaigns sometimes where a specific industry is targeted and unfortunately your business happens to be in that trade so gets an inspection.

  1. A supplier/customer of the business has had a vat inspection for a specific reason and as a result, HMRC will decide to do an inspection of their top customers/suppliers as some issues highlighted with the original inspection could apply to them also.
  1. HMRC have received a tip off about a business that requires an inspection to investigate further, however in this instance HMRC will never divulge this as the reason, it is an issue we have heard of though.
  1. The business has recently vat registered(A) or deregistered(B) and therefore HMRC will do a vat inspection to review if records are being properly as is likely in situation A, or that everything has been done correctly on deregistration, situation B.  An example in B would be closing stock in the business should be charged vat at the market rate or at least cost to claw back some of the input vat that was claimed on this stock.
  1. HMRC has spotted a discrepancy between figures submitted on the corporation tax return for a limited company or an individuals self assessment tax return.  An example here might be the sales per the vat returns for an accounting period does not match the sales submitted on the vat inspection. 

There are other reasons for getting a vat inspection; however we would say those are the main ones.

So now that you know your business is having a vat inspection, what are the top tips for a vat inspection, here are our top 7:

  1. Get the inspection on your terms

You don’t want a vat inspection occurring next week when you know your business is going to be in a really busy period.  We usually correspond with HMRC directly and will request a delay if the client needs more time to get the records all together, eg. They are in cold storage, or to get the inspection at our office as this is much better than having a vat inspector at your premises for your customers/suppliers/staff to see.  It doesn’t always work out perfectly but you need to do your best to get the vat inspection to a convenient time and place that works well for you and we’ve found vat inspectors are keen to work with businesses when it comes to this.

  1. Prepare well

It goes without saying that good preparation is needed before a vat inspection to make sure all the information that the vat inspector has requested is there on the day and there is no information missing.  Bad preparation in this regard can lead to delays and delays can be expensive in terms of your time trying to get follow up information for a vat inspector.  There is obviously the inherent truth that if a vat inspector sees meticulous records then they are less likely to be suspicious of poor record keeping and we’ve had vat inspectors say to us that because the records were so good they’ve spent less time reviewing them, which is obviously a great result for the client. 

  1. Be upfront and honest at the very beginning of a vat inspection

Sometimes mistakes happen and they can happen in any business, for example vat claimed on something that wasn’t supposed to be or the business hasn’t charged vat on a specific product or service or to a customer for some reason.  What matters in the vat inspection is that if the error has been discovered by you before the vat inspection in your preparation, our advice is always to disclose this upfront to the vat inspector at the very outset of the vat inspection meeting.  The reasons are:

  1. It gets it out of the way for you and you don’t have to worry about it which can have a really positive psychological boost for you rather than worrying about it being discovered.
  2. The vat inspector finds it on their own later on & you’ve know about it, then they are going to look worse on the digression rather than the opposite scenario where you’ve been upfront about the mistake and they will in some cases agree to suspend the penalties as a result of your honest approach.  HMRC works on a harsher penalty system where a business has deliberately withheld information.
  1. Make sure you have insurance that covers the inspection

It can take a lot of time for your accountant to help you prepare for the inspection, to attend the inspection and to follow up on your behalf.  So even though you’ve paid your accountant along the way for various services, it’s unlikely this will cover a vat inspection.  So it’s worth always checking with your accountant do they offer vat/tax inspection insurance or is it available through FSB or another provider you are paying into. 

  1. Get your business onto online accounting – Xero and Receipt Bank

As we mentioned earlier, we have acted for clients who we have setup on Xero and Receipt Bank and this means that you can effectively manage the vat inspection paperless.  All your sales invoices, customer information, vat records, bank information and purchase invoices are all available within Xero at a touch of a button and Receipt Bank stores every purchase invoice in its archive for you.  So this puts you in a far better position as means much less time preparing your records and information can be obtained instantly for the vat inspector, saving them and you loads of time.

  1. Follow up promptly and give the vat inspector the information requested

If you do need to get the vat inspector any follow up information or explanations then try and get this to them as soon as possible.  The reasons are:

  1. This gets it out of the way and means you can move on with everything
  2. You don’t want the inspection dragging out which can lead to more penalties as HMRC might see this as an example of non compliance
  1. Learn from the experience and implement any suggestions made by the inspector

There is usually some aspect or issue identified by HMRC which requires improvement on by the business and doesn’t always result in a penalty being incurred.  Therefore it’s really important you take note of those points and seek to address them as soon as possible as the last thing you want is a follow up inspection to occur and you’re being chastised for the same mistake again!

We hope this helps explain more about vat inspections and how to make it a positive experience for the business.  Please contact us if you have any queries, leave some comments below or if you are having a vat inspection and need some advice.