VAT Inspection Points to Check

If you’ve received a VAT inspection letter from HMRC, you must act promptly. VAT visits are not random — inspectors will be reviewing your records in detail, and there are certain areas where errors are commonly found. Following Brexit, HMRC has introduced new requirements for imports, exports, and cross-border supplies, which are now subject to greater scrutiny.

VAT You Have Charged (Output VAT)

Exported goods (zero-rated sales): If you export goods outside the UK — including to the EU post-Brexit — you must ensure that you:

• Correctly zero-rate the sale.
• Retain valid proof of export documents, which should be referenced against your invoice.

Discounts, refunds, and credit notes: If you reduce the value of a sale (excluding standard discounts), such as by refunding a customer, you must issue a credit note. This must clearly reference the original invoice and VAT treatment.

Private use of fuel and motoring: If your business pays for employee or director fuel that includes private use, VAT must be accounted for using the fuel scale charge or an approved alternative. HMRC inspectors will request evidence.

Cash sales and reconciliations: Cash sales must be fully recorded, with VAT applied correctly and accurately. HMRC will verify that cash takings match bank deposits and till reports.

VAT You Have Reclaimed (Input VAT)

Valid VAT invoices and receipts: To reclaim input VAT, you must hold a valid VAT invoice that displays the supplier’s details, VAT number, VAT amount, and a clear description of the supply.

Import VAT on goods: Since Brexit, import VAT is payable on goods entering the UK. You can only reclaim this if you have the correct C79 certificates or import entry documents.

Till and accounting reconciliations: If you use tills or EPOS systems, your reported VAT must reconcile with system records. HMRC frequently checks for discrepancies.

Exempt or partially exempt supplies: If your business makes exempt supplies (e.g. financial services, property transactions), you must:

• Avoid claiming VAT on purchases related to exempt income.
• Apply correct restrictions to overhead VAT claims.
• Use and document an approved partial exemption method (PESM).

General VAT Matters

Turnover reconciliation: The turnover in your accounts must match the VAT returns; otherwise, any discrepancies must be explained (e.g., timing, year-end adjustments).

Special VAT schemes: If you use schemes such as:

• Cash Accounting
• Flat Rate Scheme
• Annual Accounting
• Margin Scheme

…you must tell the visiting inspector. You must also demonstrate compliance and ensure your software is Making Tax Digital (MTD) compliant.

Bad debt relief: If customers don’t pay within six months, you may be eligible to reclaim VAT under bad debt relief. Records must show the debt was written off correctly and not later recovered.

Post-Brexit VAT Focus Areas

EU and international trade

• Sales to EU customers are treated as exports (zero-rated with export evidence).
• Import VAT applies to goods arriving in the UK.
• For digital services supplied to EU consumers, you must use the Non-Union OSS scheme to pay VAT at the customer’s local rate.

Overseas VAT refunds: Businesses outside the UK can reclaim VAT under UK refund procedures, not via the old EU portal system.

Financial and insurance services: Brexit has altered how some input VAT can be recovered on costs associated with financial or insurance services provided overseas. Annual adjustments may be required.

HMRC Hotspot Checks

During a VAT inspection, HMRC will closely review:

1. Export documentation and zero-rating evidence
2. Credit notes and sales adjustments
3. Fuel scale charges for private motoring
4. Cash sales vs. deposits
5. Valid VAT invoices for purchases
6. Import VAT records
7. Partial exemption calculations
8. Reconciliation of accounts and VAT returns
9. Compliance with VAT schemes
10. OSS and reverse charge compliance on EU services

How to Prepare for a VAT Inspection

• Conduct a self-audit before HMRC arrives.
• Keep export/import paperwork organised and easy to retrieve.
• Ensure that MTD digital links between software systems are functioning properly.
• Review partial exemption calculations.
• Check that bad debt relief claims are properly documented.
• Involve a VAT specialist to identify risks before HMRC does.

A VAT inspection is never casual — HMRC inspectors know exactly where mistakes are most likely to occur. Since Brexit, extra attention is being paid to cross-border trade, import VAT, and digital service supplies.

The best protection is proactive preparation. By reviewing your VAT processes, correcting issues early, and seeking professional advice, you can minimise penalties and prevent escalation.