At some point every business will have a visit from a VAT inspector, but is it possible to ascertain when this is likely to happen? How should you deal with an inspector and can a visit be avoided?
A business will have a visit from a VAT inspector for one of two reasons: (1) a routine visit after selection by the HMRC computer based on the type of business and the level of turnover; or (2) if you have an unexpectedly large VAT repayment. Inspections generated by a repayment return are in turn dealt with in two ways: (1) a pre-payment credibility visit in which the inspection takes place before the repayment is made and (2) a post-payment visit where the repayment is made and then an inspection is arranged where HMRC perceives the risk to be lower.
In either case the frequency and length of visit is determined by how much risk to the revenue HMRC considers the business possesses. Some factors will be outside of your control, for example if it’s a cash business or it has complex liability issues such as being partly exempt. But other factors are controllable and can reduced the perceived risk and the likelihood of a VAT inspection.
Tip: If your business has a good compliance record and sends in its VAT returns and payments on time, this will reduce the chance of a VAT inspection
Arranging a visit
HMRC will normally contact you by phone to arrange a visit at your business premises. The confirmation letter will also list what records HMRC wants to inspect and give an indication of how long the visit will last. This is a standard letter so not all businesses will have all the records HMRC requests to see, but you should make sure you have all the records you can available set out neatly to help the inspector.
Tip: If you’ve had any written rulings from HMRC, make the letter available so the inspector can understand why you have applied a particular VAT treatment. The easier you make it for them the quicker they will complete the inspection and leave you to get on with running your business.
Finding an error
If you discover an error after a visit has been arranged, even if you disclose it immediately it will not count as unprompted and will result in a penalty at the rate of 15%-30%. However, the more you co-operate in identifying and quantifying the error the lower the penalty should be. If you can show that you have changed your systems so that the error won’t be repeated then you can have the penalty suspended.
HMRC discovers. If HMRC finds an error it will write to you asking for any reasonable explanations. If the matter cannot be resolved then HMRC will issue an assessment and separate penalty notice to show what mitigating factors have been allowed in calculating the penalty.
During the visit
The VAT inspector will want to discuss the business and its accounting system with a responsible person who has a full understanding of what’s going on. If the inspector gives any verbal rulings ask them to confirm these in writing. Once the visit has finished HMRC should write to you with any rulings and confirm that the inspection has concluded.
If your business has a good compliance record and sends in its VAT returns and payments on time, this will reduce the chance of a VAT inspection. HMRC will normally contact you by telephone to arrange a visit. The confirmation letter will also list what records it wants to inspect.