Refunds | Imports | Exports
Vat investigations are not normal investigations. There are notices and case laws that impact normal practice and complaince.
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VAT investigations are headed by HMRC and are standard procedure to investigate the VAT records of any company and establish whether the correct sum of VAT is being paid or that a company is reclaiming the right sum. A VAT investigation can happen at any time, and a company is generally allowed up to 7 days to prepare for the visit, which can be delayed for a good reason. While most VAT checks are routine, a full investigation can be performed if any suspicious behaviour is reported to HMRC or if a company’s VAT reports are inconsistent and varying in nature. In instances where HMRC believe that there is fabrication in the VAT reports, a VAT inspection could be unannounced, and HMRC VAT inspectors can arrive at your business or phone you to request information and view your records if you have received a letter from HMRC contact our team of ex HMRC inspectors for advice.
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Common red flags include regular VAT refund claims, wide fluctuations or improbable changes in turnover figures, anomalies between VAT and income tax returns, inconsistencies in VAT rates applied, suspicious activity in bank statements, poor record keeping and complaints by former employees. Under-declaration of VAT liabilities or inflated refund claims tend to be the focus. Random inspections of higher risk sectors also occur.
Initially they may request relevant records like sales and purchases ledger, bank statements, accounting systems data, invoices, contracts and details of procedures. Later interviews will cover your VAT accounting processes, record keeping, apportionment methods and internal controls to identify any areas of systemic risk or concern. Ensure to be cooperative but also safeguard your rights and challenge any unreasonable requests.
Not having complete and accurate VAT records poses serious risks of penalties if unable to substantiate your VAT position under inspection. At minimum, having no VAT invoices or purchase records makes it much harder to evidence reclaimed input tax, leading to assessments for underpaid VAT, interest and possible penalties. In more extreme cases, lacking records can enable HMRC to assess VAT liabilities based on third party data and make reasonable presumptions where accounts are lacking in an investigation.
If errors or underpaid VAT is identified, financial penalties up to 30% can apply for careless inaccuracies, rising to 70% for deliberate errors, and 100% for deliberate evasion. There may also be tax geared penalties of up to 150% of the VAT underpaid in cases of evasion. Prosecution for serious cases involving VAT fraud is also possible, with potential criminal convictions.
You have 30 days to appeal the assessment if you disagree with HMRC’s findings. Strong evidence will be needed to overturn conclusions from a formal VAT inspection. An alternative is to approach HMRC requesting a negotiated settlement – they may reduce penalties and interest in return for immediate payment of the outstanding principal VAT amount. Payment plans can also be agreed for large sums due.
Proactively ensuring your VAT accounting and record keeping is comprehensive and accurate can give confidence if facing a VAT inspection. Also consider a voluntary disclosure for any known issues to minimise penalties. Seeking expert VAT advice in preparation shows cooperation and awareness of obligations. And maintaining professional, compliant relations with visiting HMRC officers tends to produce more measured outcomes.
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