If you’re a business owner in the United Kingdom, understanding the ins and outs of Value Added Tax (VAT) is essential. Thousands of businesses receive letters from HMRC every year about upcoming VAT inspections.
VAT inspections by Her Majesty’s Revenue and Customs (HMRC) can be a legal requirement for some organisations and a source of anxiety for many business owners.
However, by knowing what your VAT inspector is looking for during these inspections, you can be better prepared to navigate the process and ensure your business complies with VAT regulations.
Throughout this blog, we will be discussing what HMRC searches for in a VAT inspection, the purpose of a VAT investigation, and much more. For more information, read on.
What is the Purpose of a VAT Inspection?
First and foremost, it’s important to understand why HMRC conducts VAT inspections. These inspections are implemented for compliance checks to verify that your business is properly collecting and paying VAT.
There are many reasons why HMRC may investigate your business. This is because HMRC aims to ensure that businesses pay the correct amount of VAT, maintain accurate records, and adhere to the VAT rules and regulations in the UK. Understanding the key areas that HMRC focuses on during inspections can help you avoid potential pitfalls.
VAT Records and Documentation
One of the primary things HMRC will examine during a VAT inspection is your VAT records. Proper documentation is essential in demonstrating that your business has accurately calculated and paid its VAT liabilities.
Your records should include invoices, receipts, and any other relevant documents, and they should be organised and readily accessible.
In addition, you should be able to explain your record-keeping procedures to HMRC. They want to see how your business operates and if it has a robust system in place for tracking VAT claims and transactions and that you have kept these records for the required period.
HMRC will carefully review your VAT returns to ensure they are accurate and filed on time. This means you must correctly calculate the VAT repayments due and make them by the deadlines specified by HMRC.
Any late payments of VAT may raise concerns during the inspection. If you discover errors in your previous VAT returns, rectifying them promptly is crucial.
HMRC typically appreciates businesses that are assertive in addressing any issues or differences in their VAT returns.
VAT Exemptions and Special Schemes
There are three levels of VAT to be aware of.
- Standard Rate: This is the regular VAT rate applied to most goods and services.
- Reduced Rate: A lower VAT rate, often for essential items like food, books, or public transportation.
- Zero Rate: This level imposes no VAT on specific goods or services, such as exports or some healthcare services
Depending on the nature of your business, you might be eligible for certain VAT exemptions or special schemes. During an inspection, HMRC will examine whether you’ve correctly applied these exemptions and schemes.
This can include reduced rates, the flat rate scheme, or cash accounting schemes. Be prepared to provide evidence of your eligibility for these schemes and exemptions, as well as documentation to support your claims.
Failure to adhere to the rules overseeing these special arrangements can result in penalties and additional VAT liabilities.
In cases where your company deals with complex or international transaction services, HMRC will pay close attention to ensure you’ve accounted for VAT appropriately. This includes transactions with other EU member states and non-EU countries.
It’s crucial to be able to provide supporting documents for such transactions, such as customs declarations, shipping records, and invoices.
Having a thorough understanding of the VAT implications for international transactions can help you navigate these inspections more effectively.
Digital Records and Making Tax Digital (MTD)
With the implementation of Making Tax Digital (MTD), many businesses are required to keep digital records and submit their VAT returns electronically.
HMRC will examine your compliance with MTD requirements. Ensuring that you have the necessary digital tools and records in place is vital to meeting these obligations.
If you still need to become compliant with MTD, it’s advisable to make the transition as soon as possible to avoid potential penalties and difficulties during an inspection.
If your business involves a mix of VAT-liable and exempt activities, the inspection will include a review of your partial exemption calculations.
Being able to demonstrate a clear and reasonable method for your partial exemption calculations is crucial. HMRC may also inquire about any changes in your business that could affect these calculations.
How Can LJS Help With HMRC Investigations?
Here at LJS Accounting, we can help assist you with HMRC investigations and VAT bookkeeping. We understand that there can be times when you require advice from a professional, which is why we are here to help.
We work by assessing your options and explaining them to you in an easy-to-understand manner. This allows you to make informed decisions on something that could affect your future business, financial position and personal interests.
If you would like more information on the services we offer or to speak to a member of our team, don’t hesitate to contact us at 0151 601 0000. We are more than happy to help!