VAT Inspections: What Does HMRC Look For

14th September 2021

Thousands of businesses receive letters every year about upcoming VAT inspections - and whether you’ve received a letter or not, it’s important to know exactly what a VAT inspection is, and what the VATman is looking for. 

With VAT inspections, preparation is key. Being prepared for an inspection can prevent you from being worried or scared, and can speed up the process.

Keep reading to learn more about what a VAT inspection is, and what HMRC is looking for when they inspect your business.

What Is A Vat Inspection?

The key purpose of a VAT inspection is to ensure that you’re paying or reclaiming the right amount of VAT. Historically, HMRC would inspect businesses at random, but this has recently changed. 

In 2021, HMRC will inspect your businesses based on HMRC risk assessments. These risk assessments will consider various factors - for example:

  • Credibility checks (comparing the figures you submitted to average VAT rates of your industry)
  • Comparing your VAT return figures to your yearly account figures 
  • The risk of the sector you’re in 
  • Whether you have a history of not paying VAT 
  • Any changes in VAT repayment levels 
  • Any sales or purchase figures in your business from third parties

The general rule of thumb is that HMRC will inspect your business if they already have suspicions - they will usually inspect your business if they expect that you owe them money. 

While inspecting your business, the VATman (HMRC officers) will check your VAT records and compare them with your everyday business records.

This can involve checking your purchase books, any invoices, your bank statements, till rolls, as well as annual accounts. HMRC officers can also request access to any accounting software you may use (e.g Xero or KashFlow). 

It’s important to be prepared for the visit, as many businesses will fail to give HMRC everything they need, which could lead to you paying more tax than you should.

If you don’t provide HMRC with everything they request, then they may raise an assessment saying that you owe an exceptionally high amount of unpaid tax - and it will be your responsibility to prove them wrong.

What Does HMRC Look For?

First things first, it’s important to be welcoming and pleasant to the inspector when they arrive to get off to a good start.

When the HMRC officer arrives, expect them to ask you some questions - the name of your business, the name of your accountant, and general questions that you should know from the top of your head. 

The officer may then ask a series of questions that you may need to check the answer for. If your business is involved in certain activities, then the inspector may class you as high or medium risk.

If the activities your business is involved in are VAT exempt, then the inspector may look at these areas a bit more closely. 

The HMRC officer will also ask you if you’re receiving any VAT repayments - so be sure to explain why you’re receiving these and have any information to hand about these repayments.

If your business is involved in sales or exports to EU customers, then you may need to have more information and paperwork to hand, as the inspector will likely want you to go into detail about these activities. 

You should also expect the inspector to ask about certain areas of your business. Whether it be cash accounting, retail schemes, or partial exemption, you should have paperwork handy to back up any information.

If you charge VAT on property transactions, then the inspector will check that you’ve done this correctly. If some properties aren’t opted for, then the inspector will ensure that you haven’t claimed VAT back on them. 

If you’ve introduced cash into the business, or if you’ve had a theft, then the HMRC officer will need to know. To ensure that it runs smoothly, make sure you have any documentation to hand to back it up.

If your business has claimed VAT bad debt relief, then the officer will check that you’ve not claimed it back too early. 

Expect the VATman to ask you whether you claim back VAT on car fuel - if you do claim back, then make sure that you pay the scale charge, as the officer will also ask this.

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