Contractor guide to VAT inspections 2) How to prepare
In the previous article we looked at when to expect a VAT inspection, and what to expect. Now, for Part Two, we will look at how businesses can prepare for a VAT inspection, Karen Mulcahy, a consultant for the VAT Consultancy, writes.
Knowledge is King
In reality VAT inspections are undertaken for many different reasons, and businesses can do a number of things to prepare and lessen the potential pain and worry.
Given Her Majesty’s Revenue & Customs ‘s targeted approach to VAT inspections, businesses would be well advised to either: -
- learn the basics of VAT accounting requirements
- employ somebody who already possesses this knowledge (or would be prepared to learn), or
- consult a professional (accountant, bookkeeper or VAT specialist).
HMRC does not expect a business to know everything about VAT, just as HMRC cannot know everything about your business. Nevertheless, a VAT inspection is more likely to have a smooth ride if both parties cooperate with each other.
In practice, it is not necessary to adopt a complex or expensive accounting system and most businesses will use a system that suits the size and complexity of the business. There are many standard accounting packages available, and a spreadsheet may be all a smaller business needs to meet its VAT reporting obligations.
The 6-year rule and other VAT obligations
Outside of the details required on a VAT invoice, the only accounting document specified within VAT legislation is the maintenance of a VAT Account. This is a document which draws together all of the information required for a VAT return and includes the VAT return calculation, as well as any other adjustments, such as errors identified in previous VAT returns.
Whatever business accounting records or system a business employs, they should be kept up-to-date and retained for a period of six years, including VAT invoices. HMRC is less likely to be cooperative if several carrier bags of unrecorded invoices and receipts are presented and may result in an unnecessary assessment
The best way to prepare for a VAT inspection is not to make any mistakes in the first place – that way there will be nothing to correct and nothing to worry about. The most common errors identified tend to relate to either: -
- misunderstanding the requirements or application of the tax, e.g. the extent of VAT recovery on costs, or
- not keeping up-to-date with the ever changing face of VAT, such as changes to the place of supply rules.
Businesses should be aware that HMRC can normally assess for errors up to four years after the date of the error, but can assess for up to 20 years for fraudulent activity.
Getting it Right First Time
Some of the best ways to prepare for a VAT inspection tend to reflect good practice. For example, do you have a system for checking the VAT return calculation prior to submission? This is a relatively simple way for a business to verify the declaration figures and provides a ‘sense check’ i.e. making sure that the right figures appear in the right boxes and the correct totals have been brought forward from the standard accounting records.
Listed below are some other basic checks that can be easily applied and should not be difficult to introduce into the regular VAT return routine.
1. Check that input tax (purchase) items have not been duplicated.
2. Check the date, i.e. that the items included in the VAT return fall within the VAT return period dates, as specified on the VAT return.
3. Ensure that all sales for the period have been included.
4. Double check the arithmetic, and any formulas used to calculate the VAT.
5. Have any adjustments been made, such as credits to customers or bad debt relief?
6. Do you have funds available to pay the VAT return liability?
7. Has the business changed in any way, e.g. have you taken a different type of contract or new client in a country that you haven’t traded with before?
There are other things that you can do to ease the pressure of a VAT inspection in certain circumstances. For example, where a business is submitting a VAT return which shows a large repayment, particularly where this is unusual for the business, it may be beneficial to submit an explanatory letter to HMRC. This may occur where the business has bought a large asset during the period and is now seeking to recover the VAT charged. It may also be prudent to send a copy of the relevant invoice with the letter, so that HMRC can verify the item without needing to undertake a full verification exercise.
Businesses may also choose to advise HMRC of any other significant changes to the business, albeit that it may be difficult to identify where a notification should be sent! This may be as a result of all work being contracted to a client located outside the EU, and outside the scope of UK VAT, resulting in no VAT due and payable on the VAT return.
VAT is not rocket science, it is built on a number of basic rules and requirements – the overriding aim being for businesses to pay the right tax at the right time. If in doubt – check it out with a professional who knows.
Editor’s Note: This is Part Two of a CUK series on VAT inspections, offering IT contractors the inside track on VAT reviews and inspections from the UK’s leading independent VAT practice, The VAT Consultancy. Read Part One.