6 September 2017

VAT: Don’t be spooked by an HMRC visit

VAT has become more complex over the years and HMRC visits are on the rise – what sparks these visits and how can you prepare?

‘VAT is a simple tax…’ said Anthony Barber, Chancellor of the Exchequer on the introduction of VAT on 1 April 1973. We all know that this is no longer the case; in fact, it probably wasn’t even true when Anthony Barbour made that declaration in 1973!

Layer upon layer of legislation interspersed with HMRC guidance has resulted in VAT becoming a very complex tax over the years.

Is it going to get any easier?

The short answer is no, and it could get a little trickier. HMRC is currently suffering from an aging workforce on top of the staff cuts that have been made in the last 10 years. They are finding it difficult to keep on top of their own guidance which is, unfortunately, leading to an inconsistent approach to the tax by their officers. This is concerning for UK citizens as, if the right amount of tax is not being collected, it will ultimately affect public services.

For businesses or those inadvertently caught by the VAT legislation, it creates uncertainty around VAT accounting and record keeping.

HMRC is aware that the VAT loopholes need to be closed in order to ensure better compliance among businesses. However, in the short term, their urge to employ more officers could have drastic consequences for business while they get to grips with the complex tax legislation and the inconsistency of its application.

What factors are likely to result in an HMRC visit?

In the past, a newly VAT-registered business could expect a VAT visit in its first year of trading and then a cycle of repeat visits every few years. However, HMRC has now switched to a risk-based profiling method in order to select businesses for a visit. So, unless a newly registered business submits a large repayment claim, it could be several years before they pay you a visit.

HMRC’s risk profiling system considers a number of factors, including:

  • The business sector – fraud and non-compliance are more prevalent in some sectors than others;
  • The business’ history – directors with a poor record of compliance should expect to receive attention from HMRC;
  • Inconsistent VAT returns or spikes – a change in the profile will heighten HMRC’s interest;
  • Large repayments, or a business that is normally in a payment situation submitting a repayment return, are always likely to attract HMRC’s attention;
  • Careless or incorrect information within the pre-visit questionnaire – HMRC often sends out a pre-visit questionnaire which allows the visit to be more focused and gain more information. Careful completion of this questionnaire may satisfy HMRC’s enquiries without the need for an on-site visit. However, providing careless or incorrect information may have the opposite effect and create unnecessary suspicion, leading to incorrect assumptions that will need to be overcome during a visit.

How do I prepare for an HMRC visit?

An HMRC visit will normally be conducted by an officer that may have no knowledge of your business sector or the associated VAT rules. When arranging the visit, HMRC will normally ask to see records for the last four years. Most officers will not insist on seeing paper records, as long as you have a sample of the most recent VAT periods and can demonstrate that your older records are stored electronically.

Similar to any business meeting, if you are adequately prepared and confident with the subject matter, you will make the best impression and set a positive tone for the rest of the meeting. You should lead the meeting by talking confidently about your activities and how you operate.

Business should also be prepared to confidently explain their VAT compliance process, how the information is recorded, who produces the VAT return and how the figures are generated.

HMRC will often ask about high value transactions or areas where errors are commonly made. This includes:

  1. Changes to business activity;
  2. New income or funding sources;
  3. Exceptional land and building transactions;
  4. Business entertaining costs;
  5. Vehicles and fuel paid for by the business.

Some final tips…

It is worth remembering that a VAT inspection is not an audit. So, any failure by HMRC to look into a given transaction or practice does not translate to an approval. If you would like HMRC to review a VAT accounting treatment, you should discuss this with the officer. If you do, we would always recommend asking them to provide their advice in writing so it can be relied on in the future.

If you uncover an error during your preparation for a VAT visit, you may have missed your opportunity to have penalties mitigated. However, we would recommend explaining this to the officer and providing the full facts of how the error occurred at the start of the visit. In our experience, HMRC usually take a much lighter touch, often allowing the penalty to be suspended, if reasonable care is shown by the business.

HMRC may ask a lot of questions and will make a note of your answers. If you are not sure of the answer, or need to accurately prepare an answer, you must ask for the necessary time. Given the complexity of VAT and the potentially large sums involved, it is reasonable to ask for questions to be put in writing so you can respond to them within a reasonable timescale. An on-the-spot guess may seem the most helpful and co-operative thing to do, but it can lead to misunderstandings and significantly prolong an enquiry.

So in short…

  • Don’t panic
  • Prepare
  • Seek assistance from a professional if required
  • Don’t be pressured into a response if you need more time
  • Confirm everything in writing, especially guidance from the officer on which you intend to rely

If your business operates in a complex area of VAT, you may benefit from a pre-inspection meeting with a member of our specialist team. They can provide you with advice on handling a future HMRC visit, or simply give you some assurance that the VAT accounting and procedures you have in place are sound. Please do not hesitate to contact us if you’d like to discuss this further.

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