Coping with VAT Inspections

You’ve just been selected for a VAT inspection.

Once you have recovered from the initial fear and sense of panic, is there anything you can do to make the process less emotionally and financially painful?

Set out below are a few simple tips which may help.

If, however, you have any concerns about your VAT affairs, we are here to help. We may be able to set your mind at rest and we can arrange for specialist VAT advice or even a VAT Healthcheck in advance of the inspection.

When the appointment is made

The appointment will usually be made in advance by telephone. An administrative officer, who is unlikely to have any direct visiting experience, generally books the visits. This means it is sometimes confusing about which records will be expected, how long the inspection will last and who the officer requires to see.

Clear up any areas of doubt by speaking directly to the officer who is to carry out the visit. Misunderstandings can lead to frustration and time wasting for all concerned.

The telephone booking should always be followed by a letter from HM Revenue & Customs confirming the details of the appointment and the records required.

If you need to cancel an appointment this should be done with as much advance warning as possible. It is generally a bad idea to upset the officer by causing them a wasted journey. Human nature dictates that an officer will redouble their efforts to find errors, if they believe that they are being “messed about”.

Preparing to be inspected

Be prepared for the inspection and it will save time, costs and may avoid assessments and penalties. The following are key action points:

Audit trail

  • Know the source of the figures on your VAT return. You are legally obliged to maintain a VAT account, which is essentially a summary of output tax, input tax and credits, ideally broken down into monthly figures.
  • These monthly summary figures should be traceable back to detailed listings and ultimately back to prime documents.

Set out below are a few simple tips which may help.

If, however, you have any concerns about your VAT affairs, we are here to help. We may be able to set your mind at rest and we can arrange for specialist VAT advice or even a VAT Healthcheck in advance of the inspection.

  • The officer will want to be able to trace the audit trail in both directions:
  • For sales, a trace from prime document (for example, the sales invoice or till reading) forward through to the VAT account will show how output tax reaches the VAT Return
  • For purchases, each entry on the VAT account will be traced back to the prime document to ensure that each claim can be proved.
  • Can you explain all bankings? You need to know the source of income – the officer is sure to examine this part of the audit trail.

Consider your VAT returns

  • Is there anything unusual about them?
  • Compare output VAT (Box 1) to value of sales (Box 6) – if 1 is less than 20% of 6, can this be explained and is it consistent with the mix of sales you make?
  • Compare input VAT (Box 4) to value of purchases (Box 7) – if input VAT is more than 20% of the value of purchases then this needs investigating and explaining.
  • Are your returns consistent?
  • Can you explain fluctuations (e.g. due to seasonal variations, one-off factors, stock-building etc)?
  • If you have made any repayment claims – what was the reason for this (e.g. capital purchases; high amount of zero-rated sales)?

Have all your VAT returns been submitted?

  • If not, then submit them and retain copies for the officer.

Review your VAT correspondence file

  • At the visit, the officer may raise questions or concerns unaware that the issue was covered in detail in earlier correspondence. Be aware of this potential, as this may prove very useful during the inspection.

VAT-free income alert

  • If you are not charging VAT on sales income, why is this?
  • Do you consider your sales to be zero-rated, exempt or outside the scope.

VAT recovery issues

  • If you make VAT-exempt supplies, have you performed partial exemption calculations to determine how much input VAT is recoverable?
  • Have you restricted VAT in relation to business entertainment, car purchases and car leases?
  • Have you claimed back VAT on costs that do not relate wholly to the business?


  • The officer will compare sales on annual accounts to those declared on VAT returns. If they don’t match then any differences will need to be explained, so this can be pre-empted by preparing a reconciliation in advance.
  • Similarly, the amount of input tax claimed on returns should not exceed the maximum suggested by VATable purchases and expenses shown on the accounts.

Zero-rated exports/EU sales

  • Ensure that evidence of export/despatch is readily traceable – bad presentation in this area will lead to major conflict.

The officer will want to inspect the premises

  • Have a look round and make sure you know what he is going to see!

Identify and disclose errors

  • It may be too late to avoid penalty altogether, but disclosing errors you have found whilst preparing for the visit will be a sign that you take your compliance with VAT regulations seriously.

At the inspection

This may seem the point at which you lose control of events and at this stage, we want to be there to help you.

Under the terms of your fee protection scheme, our costs to attend the meeting will be met by the insurers. This cover includes the opportunity to brief you before the meeting, to be present at HMRC interviews with you and your staff, and to deal with subsequent correspondence.

We believe that our presence at the crucial interview stage of a VAT inspection will often help to avoid misunderstandings, which sometimes can develop into full-blown disputes.

As well as inviting us to attend the interview stage of the VAT inspection, there are a number of things you can do to ease the process:

Be courteous

  • You may not want the officer to be there; you may be annoyed that they are stopping you making money; but showing your distaste will make them more determined to find your mistakes.
  • Make them a cup of tea and give them reasonable facilities in which to work.
  • Do not be tempted to be too generous – biscuits are OK, but offering to take them out to lunch could be seen as bribery!

Choose the person the officer will meet

  • A VAT officer will invariably wish to interview a responsible person.
  • Choose a person with sufficient seniority and experience to be able to accurately answer questions raised – it can be difficult to persuade the officer later that the information they relied on was incorrect.
  • Don’t select someone who is overly ‘chatty’ – a simple rule of thumb is that the more is said, the more errors will be discovered! Questions should be answered simply and accurately.
  • Never guess an answer – if you don’t know then say so!

Make records available

  • The officer is likely to look back up to 4 years as no assessment can be issued for periods older than that
  • Officers have the power to remove records, but it is far better that you make it possible for an inspection on your premises.

At the end of the inspection

  • Ask for a clear explanation of any concerns the officer may have.
  • Ask for all such concerns to be put in writing – this will make it much easier for you and us to understand the issues.
  • Don’t act alone – dealing with a VAT dispute requires professional skill and you should seek our advice immediately.

Finally – good luck!

Even if your inspection does not end with a clean bill of health, officers are often wrong, and with the right advice the final result may be much better than you feared.

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We have grown over the years but our core value of outstanding friendly customer service remains at the center of everything we do.

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