HMRC VAT Investigation

What is a compliance check?

HMRC carry out compliance checks to ensure the correct amount of tax has been paid. Reviewing VAT returns is a constant focus for HMRC due to the sometimes-complex issues associated with VAT and the large levels of VAT debt. The majority of HMRC compliance checks are risk-based, meaning HMRC suspects at the outset that tax has been underpaid.

HMRC’s latest campaign

In April 2023, HMRC aim to issue an estimated 16,000 ‘nudge’ letters to those who are identified as having two or fewer missing VAT returns. The aim of this letter is to reduce the number of outstanding VAT returns and the current VAT associated debt. The nudge letters will also serve the purpose of encouraging timely completion of VAT returns going forward and educating taxpayers on their statutory filing requirements. 

What is a VAT investigation? 

The main purpose of a VAT investigation is to check that a business is paying or reclaiming the correct amount of VAT. A VAT investigation or inspection involves HMRC contacting or visiting the business to conduct a review of the underlying VAT records and to ask questions arising from the review. 

As standard practice, HMRC will usually give notice of a planned visit in advance. However, this isn’t always the case as HMRC do also carry out unannounced visits, where HMRC suspect fraudulent behaviour. Unannounced visits give HMRC the advantage of surprise.

What triggers a VAT investigation?

Although a VAT inspection can happen at any time, a VAT inspection is often risk-based. Such risks include: : 

• Compliance history – does your business have a history of late payments or non-payment of VAT?
• Business sector – does your business operate in a sector that HMRC consider as higher-risk of VAT irregularities for example, restaurants, hair/beauty salons and the construction industry.
• Inconsistent VAT reports - Are VAT returns inconsistent due to large increases in VAT claims or making claims where there were none previously?
• Credibility checks – HMRC compares submitted VAT returns to the average industry rates to check submissions align with the expected average. 

HMRC will escalate an inspection into an investigation when it finds significant errors. Where HMRC open an investigation, other taxes, not just VAT, can also then be considered, and thus the investigation is expanded. 

How often can VAT inspections take place? 

The frequency of VAT inspections will vary, and there is no prescribed limit on the number of inspections a business can have. They will, however, be based on the risks identified by HMRC either pre the inspection or as a result of the inspection and how complex the business’ affairs appear to be. There is also a significant link between VAT compliance history and how often a VAT check is opened – if the business’ affairs are not kept up to date, there is more chance of an inspection.

What are VAT penalties? 

In all cases where irregularities are identified, HMRC will consider charging financial penalties. When calculating penalties, HMRC will review the underlying behaviour leading to the irregularity (whether the irregularity was deliberate or non-deliberate). 

If penalties are to be charged, it will be as a percentage of the understatement of tax, and the level of penalty will depend on whether the business came forward to make a voluntary disclosure, or whether it was prompted by contact from HMRC, and the extent to which the business can be said to have cooperated with HMRC to establish the correct position.

Historically, failure to pay VAT or submit VAT returns on time (even if they are correct) would result in default surcharges after the first late return or payment (‘the surcharge period’). The level of such default surcharges increased as proportion of the VAT outstanding in accordance with the number of times you have defaulted. 

However, since 1 January 2023, the penalty regime has changed, and a new points-based system has been introduced.

How can we help?

Buzzacott’s award-winning Tax Investigations and Dispute Resolution team can guide you through the VAT investigation process and provide you with bespoke advice tailored to your specific requirements. We have a proven track record in doing so and minimising our clients exposure to unnecessary taxes, interest and penalties sought by HMRC.

As a specialist tax investigations team, we keep up to date with the relevant powers and restrictions to ensure that HMRC does not exceed the powers granted to them. 

Should you choose to get specialist advice from Buzzacott, we will: 

• Manage HMRC and the VAT investigation process to bring matters to a close as swiftly as possible to minimise disruption to your business;
• Conduct a full review of your VAT affairs, identifying any issues that need to be disclosed, providing you with an initial view as to the extent of any exposure you (may) have;
• Where appropriate, make any disclosures or representations to HMRC to ensure that you don’t pay any unnecessary tax, interest or penalties; and
• If needed, negotiate a time to pay arrangement that is affordable according to your needs and the circumstances of your business.

Get help today

Call us today on +44 (0)20 7710 3389 or fill in the form below and a member of our team will be in touch. All communications are in the strictest confidence.