As the financial controller or business owner, it’s likely to be your task to deal with the VAT inspector when he comes to call. So what records can he ask to see and how much power does he really have?

Why are  you being inspected?

VAT officers can visit your business to inspect your VAT records and make sure you’re paying or reclaiming the right amount of VAT.

HM Revenue and Customs (HMRC) usually contact you to arrange a visit, however they can also visit without an appointment and telephone you about your VAT.

HMRC normally give you at least 7 days’ notice. They’ll confirm what information they’ll want to see, how long it’s likely to take and if they want to inspect your premises. You can ask them to delay the visit.

How often checks happen

How often you get a visit depends on:

  • how big or complex your business is; ‘higher risk’ business may be inspected more frequently
  • whether you have submitted late or incorrect VAT Returns before
  • frequency of failed or late VAT payments

What period will be inspected?

HMRC can request such documents as they may “reasonably require” to determine that your records are credible and your returns are accurate.

  • Full inspection – HMRC will request the last four years of day-to-day accounting records such as cash books, purchase and sales day books, VAT account records, copy sales invoices, purchase invoices, bank statements, cheque books, paying-in slips and annual accounts.
  • Part period inspection – Although you may be asked for four years’ records, the VAT inspector will usually choose only one or two VAT returns from the current or last financial year and seek to rebuild them from source records. Only if they spot big problems there, will they then look all the way through the four years.

Copies: The inspector may take copies of your records or remove them for “a reasonable period”.

Tip: If you require any of these records for the proper conduct of your business, the VAT inspector will have to provide you with a copy, free of charge. If any item that is removed is lost or damaged you are entitled to reasonable compensation.

Preparing for the visit – how “inspection proof” are your records?

It goes without saying – the better your records are, the faster the inspector will be out of the door!

Follow our 7 Tips for keeping great VAT records

During the visit

A typical VAT inspection will include:

  • An introductory discussion with the owner or the person responsible for completing the VAT returns to:
    • Review the business activities and consider any changes since the last inspection.
    • Invite the submission of any voluntary disclosures you might want to make. If you are aware of any errors in your VAT records, disclose them – do not leave it to the inspector to discover them.
  • An inspection of your business premises to ensure all activities being carried out from them is being properly reflected in your VAT Account. The inspector will:

    • Review the credibility of your records and looking for potential ‘off-record’ and cash sales, accidental or otherwise.
    • Look at your business activities to confirm that you are applying the right rate of VAT for the business you are in, or the VAT scheme you are applying.
    • Check that you are not reclaiming VAT on a hobby business that will never generate an income?
  • A comparison of at least one years annual accounts  – year on year performance, directors loan accounts and your management accounts to check that your VAT records are in line with your business activities:
    • Do the amounts shown in your annual accounts as wages, drawings and dividends  demonstrate insufficient income to support your lifestyle?
    • If you are making regular repayment returns, why is this and how are you funding your business?
    • Is your company struggling when others in your industry are succeeding?
  • A review of a number of VAT returns covering a set period of trading, by:
    • A ‘walk-through’ of your  primary accounting records:
      • Sales, purchases, petty cash, bank statements, cash movements, directors loan account transactions, bank statements (business only) and any journals or adjustments to the VAT account.
      • Verification of source documents. The inspector will be looking to make sure you have retained copy VAT invoices/receipts – paper or electronic, contracts, VAT schedules, rent agreements, ‘option to tax’ notifications etc.
      • Whether you are cash or accrual accounting; the inspector will be looking to check that you are recording your transactions in the correct period.

HMRC will expect you to be able to produce evidence of any transaction included in your VAT workings on demand.  Paper or electronic records are both acceptable.

HMRC are generally quite reasonable and will work with you to put right any problems with your VAT. They will also tell you about any additional tax and penalty you have to pay.

Helping them with the check will reduce the amount of any penalty.

Answering queries.

HMRC can request any information that they may “reasonably require” and for this to be supplied in writing. However, they can’t compel anyone to answer vocal questions on the spot or make themselves available to be questioned.

Despite this; during a VAT visit the visiting inspector will ask many questions and assume without question that you will be talking to them. Once the introductory discussions are complete, you could have your accountant or bookkeeper go through the records with the inspector.

Tip: If in doubt, ask them to put any queries or concerns they have in writing and say that you will respond later.

After the visit

Afterwards, HMRC will write to you confirming:

  • any issues identified
  • what you must do to improve your VAT record keeping
  • any corrections you must make to your VAT account
  • if you’re overpaying or underpaying your VAT
  • any penalty you have to pay
  • and when you have to pay it by.

You can appeal an HMRC decision but you must do it within 30 days.