There was a time when 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. Some time ago HMRC switched to a risk based profiling method to select businesses for a visit. Unless a newly registered business submits a large repayment claim it could be several years before its first visit.
The risk profile considers a number of factors including:
- Fraud and non-compliance are more prevalent in some sectors than others
- The taxpayer’s compliance history, a business with repeated defaults or error corrections is far more likely to receive a visit. This also extends to directors whose previous businesses have had a poor record of compliance
- Profile of VAT returns – a change in the profile of a VAT return can indicate a change in trading style or an error that will pique 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
HMRC may send out a pre-visit questionnaire which will allow their visit to be more focused and gain more information. Careful completion of the questionnaire may actually satisfy HMRC’s enquiries without the need for an on-site visit. Careless or incorrect information on the questionnaire may have the opposite effect of creating unnecessary suspicion and lead to incorrect assumptions that will need to be overcome during the visit.
Knowing that HMRC have a specific interest in visiting a business as opposed to working through a cycle of visits may initially increase the sense of apprehension before a visit, but it doesn’t necessarily indicate a major problem. HMRC is making increased use of computer systems to assess risks and a business could fit a risk profile without actually being engaged in the activity being targeted.
Individual HMRC officers will have their own idiosyncrasies but VAT assurance visits tend to follow a standard format. Like any meeting, adequate preparation enables you to make the best first impression and set the tone for the rest of the meeting.
VAT assurance officers are ‘generalists’ who will not normally be dedicated experts in your business sector or the specific VAT issues affecting it. Giving a general background to the business will enable the officer to understand the business and any potential VAT issues. It also gives you an opportunity to speak about a subject that you are knowledgeable and confident about. Presenting a relaxed and professional demeanour from the outset is always going to be better than appearing nervous and evasive which can easily occur if the visit moves straight into an adversarial Q+A session.
A key reason for visiting a business is to review it VAT records. The records for the last four years should be available and organised in a logical order that you can easily explain to the officer.
It won’t always crop up but being able to explain the VAT compliance process, how information is recorded, who produces the VAT return and how the figures are pulled together is always useful to prepare.
If having read some of HMRC’s profiling techniques above you have identified a reason why HMRC might want to pay you a visit, it is well worth having a prepared explanation for those transactions.
There are a number of common themes that crop up during almost all VAT visits:
- Personal use of mobile phones provided by the business
- Employee expenses – especially anything that may amount to business entertainment
- Vehicles and fuel paid for by the business
- Bad Debt Relief – particularly the requirement to repay input tax on invoices that you have not paid after 6 months
A VAT inspection is not an audit and a failure by HMRC to look into a given transaction or practice does not amount to an approval.
If during your preparation for a VAT visit you uncover an error, to disclose this after HMRC have indicated their desire to visit will be treated as a ‘prompted disclosure’. This means that the opportunities to mitigate any penalties that are due as a result of the error are reduced.
HMRC will be keen to speak to the key people within a business but you can still be assisted by your VAT adviser. Provided your adviser has access to all the relevant records it is possible for the visit to be conducted entirely by your adviser and at their premises, although HMRC may still wish to visit the principal place of business afterwards.
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 time to accurately prepare an answer you must ask for the necessary time. Given the complexity of VAT and potentially large sums involved it is entirely reasonable to ask for questions to be put in writing so you can respond to within a reasonable timescale. An off the cuff guestimate may seem the most helpful and co-operative thing to do but it can lead to misunderstandings and significantly prolong an enquiry.
There are a few things you should remember if faced with a VAT visit:
- Don’t panic
- Seek assistance with your preparation and the actual visit 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
We have a number of experienced VAT specialists in the Bedrock team, if you’d like to talk to one of them about VAT issues facing your company give us a call. Alternatively take a look at the VAT pages on this website.