Have you received a letter or visit from HMRC regarding your VAT affairs? Here, our Tax Investigations & Dispute Resolution team answer FAQs about VAT investigations and inspections, addressing any fears you may have regarding how the enquiry will progress.

Why is HMRC writing to me about VAT?

Assuming you (or your company) are registered for VAT and have filed VAT returns, HMRC is seeking to establish whether your VAT declarations are correct. HMRC typically starts compliance checks either where it has specific risks and reasons to suspect your VAT returns are incorrect or, if you have reclaimed VAT due to be repaid to you, that your repayment claim is correct. HMRC does also issue VAT compliance checks randomly.

In principle, most VAT compliance checks will be undertaken in much the same way, but specific risk-related checks are likely to be more targeted and will potentially be with a more experienced and well-trained team at HMRC, who will consider charging you penalties for any errors.

If you (or your company) have not registered for VAT, HMRC will want to check whether this is correct and will review your income to establish whether the threshold for VAT registration has been met.

Should I give HMRC everything it asks for?

HMRC is entitled to information which is reasonably required to check a taxpayer’s tax position, provided it’s in the taxpayer’s possession or power to possess, and it isn’t unduly onerous to provide. Whether a particular requested item meets these criteria is sometimes unclear, and some HMRC officers have taken advantage of unrepresented taxpayers in this regard. Engaging a professional adviser will ensure HMRC is only provided with information to which it’s entitled, and/or information that will assist in bringing the enquiry to a close.

Taxpayers, or inexperienced advisers, often make the mistake of being too eager to please and give HMRC everything it asks for. While cooperation with HMRC is important, providing too much information and without due consideration and proper presentation can delay resolution of the enquiry and may cause further problems.

What happens if I have done something wrong?

HMRC will make amendments to your VAT returns (or register you for VAT from the date you met the criteria), and you will need to repay any VAT wrongly reclaimed or underpaid. Depending on the reason for the errors, HMRC will consider charging you penalties.

Can HMRC look back to prior periods?

Yes. How far will depend on the underlying behaviour that led to the errors. Generally, HMRC can look back four years from the current period, but if you have deliberately underdeclared VAT, or deliberately claimed VAT to which you were not entitled, HMRC can look back 20 years. HMRC must assess within one year of obtaining evidence of fact sufficient to justify the making of an assessment.

If you have acted deliberately, or if you believe HMRC suspects you have done so, contact us immediately.

I know I have made mistakes, should I disclose them now?

Irregularities should be disclosed as soon as possible, and any penalties will be mitigated for doing so. However, care needs to be taken to ensure such a disclosure is correct, and that you are protected from any allegation of deliberate behaviour. Our experts can assist you in making a disclosure as soon as possible, while ensuring you achieve the highest possible mitigation of any penalties HMRC may seek to charge.

Will I face penalties?

HMRC has the power to assess penalties where VAT returns have been filed incorrectly. Penalties will be charged as a percentage of the unpaid tax, and the level of penalty will depend on the behaviour of the taxpayer.

There are also some fixed penalties that can be applied where returns have not been filed.

What if I disagree with HMRC’s view?

If HMRC makes adjustments you don’t agree with, you can first request a statutory review of that decision. This must be done within 30 days (from the date of HMRC’s decision letter). Another HMRC officer, unconnected with the original investigation, will then review the case and either uphold the case officer’s view, confirm their agreement with your position, or potentially vary the decision in some way (not completely agreeing with either position).If you disagree with the reviewing officer’s view, an appeal can be made to the First Tier Tax Tribunal. Such an appeal must be made within 30 days of the reviewing officer’s decision.

Should I consider Alternative Dispute Resolution (Mediation)?

Mediation allows both parties to discuss the case, with the help of an independent mediator (but still an employee of HMRC), to try to reach an agreement without going to the Tribunal. If an agreement is reached, it is likely to be a compromise position (neither party will ‘win’), but such an agreement is often preferable to the cost, delays and uncertainty that will arise if you proceed to the Tribunal.

It is possible to go to mediation before HMRC issues a decision on a particular case, but generally, it’s used after all other avenues, aside from the Tribunal, have been exhausted.

What is the First-Tier Tax Tribunal?

Put simply, this is a court where tax disputes are litigated. The case will be argued by the parties (taxpayer and HMRC) before a judge, and an appointed accounting/tax professional, with evidence and legal arguments presented by both sides. Due to the time, work and costs involved in taking a case to Tribunal, this is usually a last resort.

What if I can’t afford the liability assessed by HMRC?

If you agree with the assessments, it’s possible to agree time to pay HMRC. Where the unpaid tax relates to VAT, this will be dealt with by HMRC’s debt management team. The length of time over which a liability can be paid will depend on the circumstances of the taxpayer. Evidence may need to be provided depending on the length of time required. Such evidence is likely to include details of monthly income and expenses, and management accounts or profit forecasts. If you disagree with HMRC’s assessments and appeal them, unlike direct taxes, you cannot postpone the disputed liability. Instead, if you cannot pay them you need to make a hardship application to HMRC.

Can I go to jail?

Criminal investigations should only occur if an individual is suspected by HMRC of having deliberately under declared, or overclaimed, VAT, as this is essentially tax evasion and fraud. Provided any errors that may be identified have arisen as a result of mistakes i.e., you had no intention to deceive HMRC, and HMRC has accepted such, no criminal investigation should take place. A criminal prosecution can only proceed if a CPS Prosecutor is satisfied that there is enough evidence to provide a “realistic prospect of conviction” and that a prosecution is in the public interest.

Can my company’s VAT liability, or penalties, be transferred to me?

If you have deliberately understated your company’s VAT liability (or overstated a repayment) but the company is unable to pay, HMRC can transfer the liability to you, and also issue you with a penalty.

Can HMRC investigate a dissolved company?

Yes. HMRC has the power to reinstate a dissolved company so that it can be subject to any adjustments/assessments that HMRC may issue.

My supplier hasn’t been paying VAT, can I be liable?

If you knew or should have known that the supplier was not paying VAT, HMRC can disallow the VAT you have claimed on the cost paid to that supplier. Effectively penalising you for their failure. HMRC has been increasingly aggressive in its pursuit of so-called missing trader fraud, and if HMRC is alleging you should have known fraud was being committed, we would advise you to speak to a professional adviser immediately.

How long will the investigation take?

That will depend on the complexity. Some investigations can be resolved in a few months, while some will take years. Working with the right professional, such as Buzzacott, will help speed up the process by ensuring HMRC only receives the information to which it is entitled, and so has less information to analyse and no reason to delay its decision.

Do I need professional representation?

We always advise seeking professional representation. While there are of course costs to doing so, these are often outweighed by the penalty savings that can be made, not to mention the peace of mind that having the right adviser will bring.

Do I need a lawyer?

No. The only exception to this is where you are under criminal investigation, but even in such cases, criminal lawyers will often utilise our expert services to defend their clients. If you are under criminal investigation, we can recommend an experienced criminal lawyer to assist you, and we can then work with them to resolve your case.

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