Back in the dim and distant past I remember leaving school and joining H M Customs and Excise as a trainee VAT officer. I was appointed to the wilds of South West Scotland and given a plastic brief case with ‘ER’ emblazoned across it to visit VAT registered businesses and check their returns. Back in those early days there was a deep suspicion and fear around VAT that often translated into a hostile atmosphere during inspections.
Many years later, I now find myself advising clients on VAT matters and often helping them deal with VAT inspectors on a regular basis, and I am often asked by clients and colleagues how best to approach an impending VAT inspection.
While it is fair to say that the outright hostility often encountered in the early days has largely gone, a VAT inspection can still strike fear into the hearts of many business people. It is a feeling very much like going through the customs channels on your way back from holiday and even though you know you have nothing extra, there is still that pervasive feeling of guilt.
What can businesses and us as advisers do to prepare and manage a VAT inspection so that sleepless nights can be avoided?
The appointment will normally be made initially by telephone and followed up with a letter detailing records required, the period to be looked at (usually the last 4 years) and requiring someone from the business is available to answer questions relating to the operation of the business.
The person making the initial telephone call is often not the person who will be carrying out the inspection, so they will not be able to answer many questions the business might have about the nature and extent of the inspection.
A confirmation letter will follow and will state the name of the officer and provide a telephone number. The letter offers more details about the inspection and will specify the records required and the length of time the inspection is likely to take. This is usually based on the size of the business, so a couple of hours for a small, simple business, to several days for a larger, more complex business.
Preparation
Preparation can begin in earnest between us as advisers and the client at the stage when the letter is received, and the first thing to identify is whether or not the client is covered by the Tax Compliance Service.
We can then review the records to see if we can identify any errors in advance of the inspection. Even the most seemingly straightforward inspection can have hidden VAT issues and it is always good to get a VAT specialist involved at the outset. This can save a substantial amount of time and money.
This can be crucial especially with regard to penalties. If an error can be identified and disclosed at an early stage the inspector is more likely to recognize that there is a commitment to compliance and will be able to suspend any penalty - depending on the circumstances surrounding the error of course!
If the client has deliberately not declared something or deliberately concealed something, then that would not be covered by the Tax compliance service and we would need to advise the client of the correct course of action specific to circumstance and provide assistance as appropriate. Normally, however, it is an error that falls into the “careless” category that crops up and this can be dealt with, usually fairly amicably, on the day of the inspection or - as increasingly seems to be the case - by subsequent correspondence.
The Visit
The officer will want to speak to someone who really comprehends the day to day running of the business and will need to ask questions that enhance their own understanding and satisfy them self of the credibility of the business, focusing their attention on areas that are more likely to produce errors that lead to an underpayment of VAT.
The main focus of HMRC during these inspections is simply to identify additional revenue, for example, it could be as part of an exercise looking at particular trade categories or there may be some issues with the declared VAT returns i.e. the payments may be low or there might be repayments on a regular basis that are not in keeping with the information on the Revenue’s systems.
Consider also where the visit will take place; HMRC policy is that the visit should take place at the principal place of business (PPOB). This is not always convenient and quite often the inspector can carry out the visit largely at Armstrong Watson premises and go to the PPOB separately as inspecting premises can form a part of the inspection process.
It is always preferable to try to form a rapport with a VAT inspector. Being hostile or questioning their powers to look at something is rarely a successful tactic as they generally have every legal right to have records produced and obtain information. Additionally, there are penalties for failure to produce records by certain deadlines.
It is not always possible to maintain a convivial environment and sometimes it is necessary to stand your ground in certain areas. This is where an experienced VAT specialist is really worthwhile. Within the team we know exactly when an inspector is exceeding their authority and can deal with this firmly but tactfully.
Even if you think the inspection is straightforward please get in touch with the VAT team. We are always happy to help!
For more information or advice on VAT matters, please get in touch with Steve Ferrie on 01228 690194 or email at stephen.ferrie@armstrongwatson.co.uk.
