What is a VAT investigation?
A VAT inspection takes place when the HMRC wishes to visit and inspect your VAT records in order to make sure that the right amount was paid, as well as ensure that proper compliance measures are followed. The HMRC will usually call you and arrange the investigation in advance, normally 7 days prior but they may also do so without any warning.
What triggers a VAT investigation?
A VAT inspection can be triggered by a variety of different factors, even to the point of being random. However, several different factors can increase the chances of one taking place:
- Your business failed a credibility check
- Your business operates in a high-risk sector
- HMRC may have become suspicious of your business due to new information
- They detected an abnormally large amount of VAT claims coming from your business
- Your compliance history involves late or non-paid payments of VAT
- HMRC wishes to verify your suppliers
- HMRC wishes to verify your customers
How likely inspections are will be determined by your VAT return history as well as various other factors such as the size and complexity of your business.
How far can it go back to?
Generally, HMRC can only inspect records that go back by 4 years. However, if it is thought that you were careless then they may extend this to 6 years, and if fraudulent activity is suspected then they can inspect records that go back by 20 years. If an entitlement to a repayment of VAT is the only thing that needs to be verified then its more than possible for the VAT inspector to only look at one of your VAT returns upon their investigation.
How long does the investigation take?
There is no real set limit to how long the HMRC can investigate you for. Meaning that they will do so for as long as necessary for them to determine the required outcome. Depending on how large and complex your business is this means that it can take anywhere from a few months to even a few years or longer.
A visit to your business during the investigation may take anywhere from 1 to 4 days depending on the structure and size of your organisation. Once the inspection ends, the inspector may request further information or queries which you will normally be given 30 days to respond to.
The length of the investigation itself can vary based on its nature and findings. If no mistakes are found during the inspection, then an immediate conclusion of the investigation may take place. However, if errors are found that were caused by negligence or oversight then the length of the investigation will likely increase in length proportionally to their findings. If an error is found that indicate deliberate tax evasion then a prolonged investigation will take place that will focus on investigating all tax affairs of your business.
What happens at the end?
If an error is found, you will either be asked to make an adjustment or in worse circumstances be issued with an assessment which may lead you to paying interest or penalties. Once the investigation concludes you will receive a letter from the HMRC which will explain:
- What should be done to improve your VAT record, if it needs improvement
- Any corrections that need to be made
- Any VAT that has been overpaid or underpaid
- Any penalties that you were given and must pay
If you wish to appeal the HMRC decision at the end of the investigation you will have 30 days to request a statutory reveal or submit an appeal to the First Tier Tribunal.