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February 2024

hmrc-vat-audit

How to Prepare for an HMRC VAT Audit and What to Expect

By Customs Duty news|VAT news, VAT news

It is fair to say that having a VAT audit from HMRC for the first time can be a daunting prospect, so this article will walk you through what you can expect before and during the  VAT audit and offers an insight into how to best prepare so that the process is as painless as possible.

NB the article does not relate to VAT audits for large businesses that are part of HMRC’s Large Business programme as these businesses have a specific VAT audit framework in place for ongoing monitoring rather than ad hoc audits.

 

Types of VAT Audit

VAT audits in the UK can arise for a number of different reasons:

  • audits arising following the submission of a repayment VAT return which is of higher value than normal or the first VAT return submitted following registration showing a repayment. These are called ‘pre-creds’ (pre-repayment credibility checks);
  • standard VAT audits arising for a variety of reasons including the following:
    • the business has not been audited for a number of years;
    • it is complex from a VAT perspective in terms of the industry it operates in ;
    • due to the fact that HMRC are carrying out audits on specific types of business (eg following litigation on another business in the industry);
    • an HMRC officer auditing another business may identify an invoice from the business that looks odd and eg shows different VAT treatment to what they would expect. They can raise an internal reference to have another officer audit the business issuing the document in question

Generally speaking, having a VAT audit is not always a bad thing – they can serve us a reasonably effective VAT health check to give assurance that the business is accounting for VAT correctly.  However it is important to note that HMRC do not check all transactions or all VAT return periods and don’t give a ‘clean bill of health’ post audit.  In addition they are entitled to revisit any areas they have reviewed previously provided this is within the four year statute of limitations that applies for VAT.

 

Pre-Credit VAT Audits

In addition to being triggered for the reasons above, a pre-cred check can be triggered if a business normally making payments to HMRC submits a repayment return, for example if they have made a large purchase in the period in question.

These audits normally takes the form of desk audits carried out by an HMRC officer in the pre credit team.  They will make contact with the business and explain what they would like to review in order to carry out a desktop audit of the VAT return that has triggered the audit.  This will typically include the top 10 purchase invoices by value, a selection of sales invoices if applicable, and they will also want a description of the business activities.

If you are filing a repayment VAT return in the circumstances set out above, it is worthwhile making sure you hold valid VAT invoices in the business’ name in order to support the VAT recovery on the VAT return.  This is obviously a basic requirement for reclaiming VAT in any event but it is still advisable to review the documents in question before submitting an unusual that return so that you can be responsive to the request for the documentation by HMRC.  If your review reveals that there are errors on the invoices from third party suppliers, such as it being addressed to the incorrect or incomplete entity, you should contact the supplier to seek an amended invoice prior to the VAT audit taking place.

Providing the information requested promptly means that HMRC will be able to review the  return and supporting documentation and sign off on the repayment as soon as possible.  Delays mean that the repayment due to the business will be delayed.

HMRC have relatively quick processing targets for pre-cred queries and if they have been provided with all of the information requested and have still not made a repayment within 30 days, the business should be entitled to interest.

 

Standard VAT Audits

HMRC will typically contact the business to explain that they wish to carry out a standard VAT audit at some point in the future, usually giving a few weeks notice.  It is perfectly acceptable to ask HMRC to postpone the audit if there is a commercial reason for doing so, eg if the planned audit were to take place during year end or during a period of staff absence.  There is not likely to be an objection to this provided the audit is not postponed more than once or twice.

Some VAT audits now take place as desktop audits and a similar process to that outlined above for pre-cred audits could take place. However post Covid HMRC are now undertaking more VAT  audits on site.  The reason they prefer to carry out site audits where possible is because the site visit will involve an all important walk around the premises/offices to get a sense of whether what they are seeing matches with what they see on the VAT return. This is particularly important for businesses trading in goods and they would likely want to walk around the warehouse etc to see if the size and scale of the business matches VAT return values.

They may also wish to speak to staff during the audit but this can be managed appropriately, for example by agreeing with HMRC beforehand which staff they would like to speak to and arranging time slots for them to come to see HMRC in a meeting room if preferable.

 

Information Requested by HMRC

During the process of making the appointment for the audit HMRC will specify which VAT returns they wish to see. They are able to review VAT returns and related documents going back up to four years and you will need to make a variety of documents available to HMRC during the audit or afterwards.  This will include copies of VAT returns the associated sales and purchase ledgers, underlying purchase invoices from suppliers and copy sales invoices, as well as bank statements and annual accounts.  These documents enable HMRC to trace an audit trail from the source documentation through to the VAT return.  It is important that whoever is leading the VAT audit with HMRC is familiar with and understands the audit trail within the documentation and is able to explain this clearly to HMRC.  This facilitates the progress of the VAT audit and it likely means HMRC will have fewer queries as they work through the documentation, ultimately meaning they can carry out their checks more efficiently.  Therefore if you have had staff changes and the member of staff leading the audit was not involved in preparing the VAT return figures for the earlier periods ie four years ago, it is advisable that a review is carried out internally before hand so that they can familiarise themselves with the audit trail.

 

Pre Audit Checks

It is worthwhile carrying out a VAT health check before any HMRC audit or having an external VAT advisor do this so that you are aware of any issues.  At the beginning of the VAT audit HMRC may ask if there are any VAT errors the business wishes to disclose before they begin their checks.  It is advisable to notify them of any such errors and if you have evidence that you were already working on disclosing a particular error before they contacted the business to inform it there would be a VAT audit,  it is possible that this will not be treated as an error ‘prompted’ by HMRC.  This would reduce any penalties applying.  Otherwise if you discover errors after becoming aware HMRC would be carrying out an audit it is likely they would in the first instance regard these errors as being ‘prompted’ by them which means higher penalties may apply.  It is therefore down to the business to evidence why the error was not discovered as a result of knowing a VAT audit would take place.

 

What happens during the Audit

HMRC will typically start the audit by having a walk around the premises and once they have done this they will meet with whoever is leading the audit and have a discussion about the business activities.  This is an opportunity to make it clear to HMRC what the various revenue streams of the business are, the customer base and the types of purchases that are made.  This will give them an idea of the types of transaction they can expect to see on the VAT return.  It is then helpful to walk them through the audit trail in the documentation that has been requested.  They can then be left in a meeting room to work through the documentation on their own.  Audits last one day and at the end of the day HMRC will regroup with the business to give an overview of their findings

The business should be given an opportunity afterwards to provide any documentation that was not available or to find out the answer to any questions of which they are uncertain.  Once HMRC have concluded their checks they will usually confirm this in writing but will not provide a ‘clean bill of health’ as set out above.

 

What if HMRC find Errors?

If they do discover VAT errors, they will raise an assessment after the audit and this will need to be paid within 30 days unless the business disputes the findings, in which case an appeal can be made.  If the business has B2B customers and has ‘VAT exclusive’ contracts with them, any VAT errors assessed by HMRC can be invoiced to the business customers (from a legal perspective – clearly the commercial relationship needs to be considered here).  However if the business has inadvertently omitted to charge VAT to a customer a ‘VAT only’ invoice can be raised to recover the VAT amount from the customer.  They will be able to recover this VAT on their VAT return subject to their normal VAT recovery profile. If the business deals with B2C customers and has not charged sufficient VAT, this will form a bottom line cost for the business as it will need to meet the cost of the additional VAT due from profits.

 

How The VAT Consultancy can help before, during and after a VAT audit

Many of our VAT consultants worked as HMRC VAT auditors early in their VAT careers and therefore this experience, coupled with our regular dealings with HMRC in relation to VAT audits for our clients, means we are well placed to hold your hand before, during and after a VAT audit.  This may take the form of a pre audit VAT health check to ensure any key areas of concern are identified and discussed before the audit, we can attend the audit with you (although HMRC tend to be less keen on this).  However it may be a good idea if you do not have members of staff who were close to the VAT return process during the earlier period.  Post audit we can help you determine whether any VAT assessment that HMRC are proposing to raise sound ‘fair and reasonable’ and we can also help you determine what corrective action should be taken in relation to your clients and suppliers.

 

The VAT Consultancy is highly experienced and provides relevant and practical advice to help you deal with the pre and post VAT audit. We provide global VAT and customs duty advice and VAT compliance services.  To discuss how we can help contact us today or call us on +44 203 2806902