Facing a VAT investigation can be a stressful experience. Dealing with the investigation itself is time consuming and disruptive to your business operations, and the consequences if HMRC identifies problems with your VAT reporting can be severe. Accordingly, most businesses instruct a VAT investigation specialist to assist them with preparing for a VAT investigation, represent them during the investigation and advise how best to address any issues that arise.
We are a team of skilled solicitors and barristers with a unique commercial focus gleaned from our decades of working for public sector bodies and leading private corporations. Our dedicated HMRC team deals exclusively with HMRC related matters and are recognised VAT investigation specialists.
Why does HMRC conduct VAT Investigations?
According to Government figures, there was a £7.6 billion VAT gap in the 2021-2022 tax year. It is, therefore, clear that many businesses are underpaying VAT, either by mistake, negligence or deliberate fraud. In a bid to close this gap and recover the lost VAT, HMRC instigates thousands of VAT investigations each year.
The primary purpose of a VAT investigation is for HMRC to satisfy itself that the business under investigation is properly complying with its VAT obligations. HMRC officers review the business’s VAT records and check that it is accounting to HMRC for all VAT charged to customers and not reclaiming more VAT than it should be.
How likely is your business to face a VAT Investigation?
HMRC used to choose businesses at random to undergo a VAT investigation. Now, the process is more targeted and based on a computerised risk assessment. As a very general rule of thumb, most small businesses can expect a visit from HMRC every 7-10 years.
Various factors can trigger a VAT investigation. Some are business specific; for example, the business has a history of filing late returns, has submitted an unusually large amount of VAT claims, or HMRC has received a ‘tip off’ that the business’s VAT practices may not be in order. Other factors are external, such as the business operating in an industry that HMRC perceives to be ‘high risk’.
Most initial VAT investigations are straightforward ‘compliance checks’. They are not designed to catch you out but are simply a means by which HMRC can confirm that you understand your VAT obligations and adhere to them.
How to reduce the chances of being selected for a VAT Investigation
Whilst it is impossible to avoid VAT investigations completely, you can take proactive steps to reduce the likelihood of being selected for one. They include:
- Filing VAT returns and other documentation on time. Late filings can indicate general disorganisation within the business and be a red flag for HMRC.
- Anticipating any questions or concerns your VAT return might raise, such as a marked increase in VAT claims, and providing an explanation at the time of filing.
- Implementing a watertight system for filing VAT returns and other documentation with HMRC. Employing the services of a VAT specialist, even when your business is in its infancy, is money well spent to ensure compliance with the relevant laws and avoid prolonged, time consuming investigations into your business affairs.
How to prepare for a VAT Investigation
HMRC will usually give notice of its intention to carry out a VAT investigation by letter or telephone call at least 7 days in advance. If the proposed date is inconvenient, you can ask for it to be rearranged. It is best to do this sooner rather than later to avoid irritating the officer.
By using the time between receiving notice and the investigation to prepare thoroughly, you can improve the likelihood of the investigation proceeding without issue and being a positive experience.
HMRC will often provide details of the documentation its officers would like to review and how far back the investigation will go, which is usually 4 years. You should collate all relevant documentation ahead of time and ensure you can coherently answer any questions about it, explain your general commercial operations and discuss your tax compliance systems.
If you have outstanding VAT returns, you should ensure they are completed and submitted before the investigation. If a specific event or issue gave rise to the investigation, your VAT investigation specialist will contact the HMRC officer to clarify the scope of the investigation and ensure your preparation is targeted appropriately.
HMRC will expect personnel with a thorough understanding of both the business’s operations and VAT returns to be available to answer questions during the investigation. Many businesses also choose to have their VAT investigation specialist on hand to support them throughout the process, clarifying any points of difficulty and ensuring the investigation runs smoothly.
How our VAT Investigation specialists can help
It is crucial that a VAT investigation is handled correctly. HMRC has far-reaching powers to impose a wide range of penalties on businesses found to have contravened their VAT obligations, from ensuring any shortfall is repaid to launching a criminal investigation. Our specialist HMRC team possess superb technical knowledge of HMRC practices and regularly act for clients facing a VAT investigation. We will ensure your business is fully prepared for the investigation, address any potential issues head-on and, if problems arise, negotiate with HMRC on your behalf to secure the most lenient penalty possible.