How to prepare for a VAT audit

HMRC carry out many types of VAT checks, from verifying a single VAT period to unannounced visits to address areas of high risk.

Two former VAT inspectors with nearly 50 years of experience between them share some simple hints and tips for organisations to follow to help make HMRC VAT audit checks run smoothly.

VAT repayments and inspections

The most common types of VAT checks are either repayment (formerly known as ‘pre-creds’) or routine inspections (compliance checks).

Single period checks are usually triggered by the submission of an unusual VAT return. Many businesses regularly submit VAT returns with a repayment due and it is perfectly normal for them to do so, however, if the total is extraordinarily high a check may be prompted. Likewise, a first return (repayment) can trigger a response as well as a repayment return submitted by a business which is usually in a payment position.

‘Routine’ inspections can happen for various reasons. It could be that a particular trade sector is presenting a specific risk, or perhaps that the business has shown unusual trading activity which may give rise to concerns over its ‘credibility’. A business may also be selected to test that HMRC’s risking process is working – businesses which are considered compliant may be inspected to confirm that this is indeed the case.

A VAT inspection is, in part, HMRC’s way of gaining better understanding of your business. By making contact and checking records they will be better placed to know what changes may or may not present a risk. For example, a visit to a business listed on its registration application as a ‘newsagent’ could be a freelance journalist (true story)! The VAT profile for each is very different and so when considering the VAT returns that are submitted this revised information can be taken into account.

Hints and tips for VAT inspections

• With the closure of local offices around the country, most VAT inspections will now be carried out remotely. However, if a mobile officer happens to cover the area an in-person visit may still be arranged. This is particularly true in and around cities with an HMRC Regional Centre.
• At the outset of most VAT inspections the officer will want to gain a better understanding of the business. They will want to discuss business operations etc with a director or similar, but the records checks can often be completed via accounts staff.
• The start of the meeting is the time to disclose any errors that may have been identified in the records. Whilst a planned inspection will mean that any disclosures made are ‘prompted’ for penalty purposes, a quantified disclosure will maximise mitigation.
• If there is an error to disclose, it is prudent to be able to explain how it came about and how the business is addressing/correcting any weaknesses. In some circumstances this may allow a penalty to be suspended.
• Know the business – sounds basic but being able to outline all the business activities and sources of income to the officer will give some reassurance from the outset.If there is any uncertainty it is best not to answer but to ask to revert when confirmation has been sought.It can be difficult to convince HMRC that facts are not correct especially where the initial fact pattern leads to an amount falling due to HMRC.
• If confidentiality reasons make it inappropriate for staff to overhear conversations with the officer, please make HMRC aware of this. There are likely to be questions throughout the check so having somewhere private to discuss them is helpful.
• The officer will need access to accounts records for up to four years. In most cases now you will be asked to digitally transfer specified records in advance or after the meeting. However, if the officer is on site, they will not be allowed to use live systems unless specifically trained to do so. If possible, set up a read-only access in advance and show the officer where the report functions are.

What records would HMRC look at?

As part of a repayment or a compliance check an officer will ask to see records to support the completion of a VAT return. It does vary as to what evidence the officer may request to see but the following are typical documents that you may be asked for during a check.

• VAT workings/summaries – this will be a list of transactions that make up each of the VAT return boxes. HMRC will check this to gain a better understanding of what is in included in boxes 1 to 9.
• VAT invoices – a check of sales invoices and purchase invoices. The officer may particularly want to see sales invoices where no VAT has been charged and purchase invoices which are significantly higher than normal.
• Check of bank statements – an officer may carry out a bank reconciliation (especially when business is on cash accounting) to ensure all business income is on the VAT returns.
• Comparison of SA returns (sole prop) or CT returns (company) - to ensure that there are no discrepancies between the income figures declared.

Hints for repayment VAT return checks

• Generally, these types of checks mean that the repayment is withheld until HMRC are satisfied that it is correct. For this reason, it pays to be primed and ready to respond.

• In many cases checks can be completed remotely, by questionnaire and/or phone.
• Anticipate queries that could be raised by the HMRC officer. If a VAT return has an unusual repayment or if it is a first return it is much more likely to be selected for verification. It can be worth asking your professional adviser to review the data that will be given to HMRC so they can advise you of any expected queries that may arise.
• If possible, prepare a file containing the documents that are most likely to be requested. The following list is often part of an initial check:
  • a copy of the VAT return – detailed
  • top ten sales invoices
  • top ten sales invoices (without VAT)
  • top ten purchase invoices
  • C79’s and PIVA statements
  • top ten reverse charge purchase invoices
  • further information about any exceptional transactions – for example if a property was purchased, please be prepared to show an option to tax application, contract of sale etc.
  • details of any corrections made relating to previous VAT periods.

• The above list is something you may wish to compile on a regular basis to facilitate management checks of your returns.
• If there is a change in the business profile or if there is a specific reason for an unusual trading pattern, make this known to HMRC and provide supporting evidence if appropriate.

This is also a golden opportunity to brief HMRC about future returns. For example, if the business has a new export contract meaning that a greater proportion of its sales will be VAT free, it is recommended to explain this to HMRC so that a note can be made, hopefully preventing any immediate follow-up questions.

And remember, whatever type of check, HMRC are constantly re-evaluating risk and how to address it. Presenting as confident, knowledgeable, credible, and responsible gives the best first impression.

Whatever the check, contact with HMRC can be very useful so don’t be afraid to ask questions of the officer. For example, if you need to update your registration details for any reason the officer may be able to action them as part of their duties.

In most cases, and at the end of the check, the officer should run through their findings. They may require further information to clarify something, or they may have found an error (in either parties’ favour). This is a good opportunity to ask questions if the issue being raised is complex or something the business is unfamiliar with. It may also be helpful to have a second person from the business present. Very often when there is a lot of information being shared it can be difficult for one person to absorb it all. Taking contemporaneous notes can also be helpful. 

Common errors

Businesses are faced with a multitude of potential pitfalls when managing their VAT compliance. But there are a few error types that can be avoided by an objective and critical review of the business profile. For example, have all streams of income been considered.  Aside from the main activity there may be sales to staff (including salary sacrifice schemes), canteens, tenants on site, or perhaps goods/services supplied to staff at discount. Another potential source of income is waste material or disposals of assets (this will include items part exchanged). All these non-core activities are potential VAT risks. Failing to keep export evidence for goods dispatched overseas is also another easy mistake to make.

Dates and tax points can cause errors – for example if an invoice is delayed it may miss the preparation of the return. Ensuring that ‘unreconciled transactions’ from previous periods are not missed altogether is an important control.

On the purchases side it is important to exclude non-business expenditure. Retain evidence of checks the business carries out to confirm the bona fides of suppliers. For example, VAT numbers can be checked via Check a UK VAT number. A screenshot of the result can help to show that appropriate due diligence is being observed.

How Crowe can help

Ultimately, even where genuine errors are discovered matters are usually resolvable. With an experienced team of VAT (including former HMRC VAT officers) and Customs specialists, Crowe is very well placed to support businesses through this process. If you have an inspection coming up or if you would like us to carry out a VAT ‘health check’ to give you some reassurance, please contact Robert Warne, or your usual Crowe contact.