VAT checks, are they different to other enquiries?

VAT checks are typically conducted in “real-time,” unlike Income Tax and Corporation Tax enquiries, which often focus on historical transactions.

Since VAT returns are filed more frequently – usually on a monthly or quarterly basis – HM Revenue & Customs (HMRC) often initiates VAT checks within weeks of submission.

By contrast, Income Tax and Corporation Tax returns are typically filed several months after the relevant year-end.

Once submitted, HMRC generally has 12 months to open a tax enquiry, meaning tax investigations often target transactions and events that took place some time ago.

In this article, we look at several key differences between VAT checks and other types of enquiries.

On site

Unlike most direct tax enquiries, which HMRC usually handles via correspondence, VAT checks are more likely to involve an in-person “VAT visit” to your business premises.

VAT legislation sets strict requirements for invoice details, so a VAT visit often includes checks to ensure that the necessary documentation has been correctly issued and received for both inputs and outputs.

Additionally, VAT returns that result in a repayment are considered “high risk” by HMRC.

When HMRC is issuing repayments, it often wants to confirm that the business is legitimate and actively trading.

New traders are especially likely to receive an initial site VAT check to verify the authenticity of their operations.

Less flexible

VAT legislation is typically more rigid than direct tax rules.

For instance, in a direct tax enquiry, if HMRC questions whether a company has incurred an expense on purchasing a lorry for business use, they may request supporting evidence.

This may include bank statements, a delivery note, or even photographs of the lorry in operation.

The key concerns for a direct tax inspector are whether the company genuinely incurred the cost and whether the asset is used for business purposes.

In a VAT check, HMRC will consider these factors but will also focus on whether the supplier is VAT registered and whether their invoice meets all legislative requirements if VAT is being reclaimed.

While a brief handwritten receipt might suffice in a direct tax enquiry, it would not be acceptable for VAT purposes.

For those using a ‘margin scheme’, for example, a VAT inspector will be concerned with checking that a trader is recording and retaining all the information required by the scheme.

Keeping records in a way that makes sense to you but is not in accordance with a VAT notice or guidance might not be enough.

VAT nudge letters

HMRC has used ‘nudge’ letters in relation to direct taxes for years, for example in relation to let property.

These letters are sent when HMRC has gathered data suggesting that tax returns may be inaccurate or that income has been undeclared.

The letter encourages the taxpayer to review their records and, if necessary, correct their position.

In direct tax cases, these letters typically point the taxpayer to a specific disclosure facility.

Recently HMRC has started to use these in relation to VAT checks.

For example, HMRC now has more data from online selling platforms, and has sent nudge letters to traders where HMRC’s data differs from VAT returns submitted.

The letters require a response and ask for details of any errors found.

They also request that any errors are corrected, either by submitting an error correction notice or by making the correction in the next VAT return, if that is possible.

Exempt or zero-rated supplies for VAT

Some supplies can be exempt from VAT, or zero-rated. There are often nuances around this and mistakes can be made.

Famously there have been tax cases considering in detail whether certain sweet foods are cakes or biscuits, all because the VAT treatment will differ.

This is a concept that does not exists in direct tax. These types of VAT considerations extend into supplies of medical services, housing development and more.

In areas where these concepts may apply, HMRC takes a keen interest. It is important to apply the correct VAT rate to a supply.

Getting it wrong could result in additional output tax being due, or input tax being denied.

Kittel notices

Kittel notices are a powerful tool that HMRC can use in VAT enquiries.

Where HMRC identifies that one trader in a supply chain is committing a fraud, it has the power to deny the input VAT claim for another trader in the supply chain.

For instance, if you purchase goods worth £1.2 million from a supplier and reclaim £200,000 in input VAT, but the supplier fails to pay the VAT to HMRC and vanishes, HMRC can deny your input VAT claim if they believe you knew or should have known that the transaction was linked to VAT fraud.

Kittel Notices have serious consequences and often involve large amounts. They can be defended, but you should seek expert advice help if you receive one.

We’ll be writing about Kittel Notices in more detail soon.

VAT Appeals

We have previously published an article on the VAT appeal process, which you can read here.

In brief, there are some similarities between VAT and direct taxes, but if you disagree with a VAT assessment, appealing to HMRC is not an option.

You must either first accept a review of the decision or notify an appeal to the Tribunal.

It is important to note the time limits for taking this action and make sure you adhere to them.

When a VAT assessment is appealed to the Tribunal, the disputed VAT must be paid to HMRC before the appeal can be heard.

This doesn’t apply to direct tax assessments.

If the disputed VAT cannot be paid, a hardship application can be submitted.

If accepted, the appeal may proceed with either no payment or a partial payment of the disputed VAT.

If you need help with a VAT check or appeal, please get in touch.

You can get in touch with our friendly and experienced team on: 0203 675 8122 or email jeremy.johnson@intaxltd.com.

inTAX is a specialist tax disputes firm. We deal with disclosures, investigations, and tax enquiries of all descriptions, including COP9, fraud investigations, VAT fraud, tax avoidance, let property disclosures and tribunal appeals.

However, we don’t just deal with the serious end of tax investigations. We are also happy to handle smaller enquiries, disputes and problems that can be equally as worrying for our clients.