Category Archives: VAT Inspections

VAT: How long do I have to keep records?

By   26 June 2023
0
Time limits for keeping records

Record keeping is a rather dry subject, but it is important not to destroy records which HMRC may later insist on seeing! I have looked at what VAT records a business is required to keep here, but how long must they be kept for?

This is seemingly a straightforward question, but as is usual with VAT there are some ifs and buts.

The basic starting point

The usual answer is that VAT records must be kept for six years. However, there are circumstances where that limit is extended and also times when it may be reduced. Although the basic limit is six years, unless fraud is suspected, HMRC can only go back four years to issue assessments, penalties and interest.

Variations to the six year rule

One Stop Shop (OSS)

If a business is required to use the OSS then its records must be retained for ten years (and they should be able to be sent to HMRC electronically if asked).

Capital Goods Scheme (CGS)

If a business has assets covered by the CGS, eg; certain property, computers, aircraft and ships then adjustments will be required up to a ten year period. Consequently, records will have to be retained for at least ten years in order to demonstrate that the scheme has been applied correctly.

Land and buildings 

In the case of land and buildings you might need to keep documents for 20 years. We advise that records are kept this long in any event as land and buildings tend to be high value and complex from a VAT perspective, However, it is necessary in connection with the option to tax as it is possible to revoke an option after 20 years.

Transfer Of a Going Concern (TOGC)

This is more of a ‘who” rather than a what or a how long. When a business is sold as a going concern, in most circumstances the seller of the business will retain the business records. When this happens, the seller must make available to the buyer any information the buyer needs to comply with his VAT obligations. However, in cases where the buyer takes on the seller’s VAT registration number, the seller must transfer all of the VAT the records to the buyer unless there is an agreement with HMRC for the seller to retain the records. If necessary, HMRC may disclose to the buyer information it holds on the transferred business. HMRC do this to allow the buyer to meet his legal obligations. But HMRC will always consult the seller first, to ensure that it does not disclose confidential information.

How can a business cut the time limits for record keeping?

It is possible to write to HMRC and request a concession to the usual time limits. HMRC generally treat such a request sympathetically, but will not grant a concession automatically. If a concession is granted there is still a minimum allowance period of preservation which is in line with a business’ commercial practice.

Computer produced records

Where records are stored in an electronic form, a business must be able to ensure the records’ integrity, eg; that the data has not changed, and the legibility throughout the required storage period. If the integrity and legibility of the stored electronic records depends on a specific technology, then the original technology or an equivalent that provides backwards compatibility for the whole of the required storage period must also be retained. 

How to keep records

HMRC state that  VAT records may be kept on paper, electronically or as part of a software program (eg; bookkeeping software). All records must be accurate, complete and readable.

Penalties

If a business’ records are inadequate it may have to pay a record-keeping penalty. If at an inspection HMRC find that records have deliberately been destroyed your they will apply a penalty of £3,000 (this may be reduced to £1,500 if only some of the records are destroyed). In addition, there will be questions about why they have been destroyed!

VAT: Mind the gap – HMRC latest figures

By   23 June 2023
0

GOV.UK has published details of the most recent measurement of the tax gap for 2021-2022.

What is the tax gap?

The tax gap is measured by comparing the net tax total theoretical liability with tax actually paid. This is comparing the amount of tax HMRC expected to receive in the UK and the amount HMRC actually received.

The figures

The tax gap is estimated to be 4.8% of total theoretical tax liabilities, or £35.8 billion in absolute terms, in the 2021 to 2022 tax year.

Total theoretical tax liabilities for the year were £739.3 billion.

There has been a long-term reduction in the tax gap as a proportion of theoretical liabilities: the tax gap reduced from 7.5% in the tax year 2005 to 2006 to 4.8% in 2021 to 2022 – remaining low and stable between the years 2017 to 2018 and 2021 to 2022.

Criminal activity and evasion accounted for £4.1billion loss in tax collected.

30% of all underpayments of tax were due to a failure to take reasonable care, while 13% of instances were down to evasion.

A massive 56% of the tax gap is made up by small businesses (up from 40% of the total in 2017-18). Whether this is down to HMRC improving collection from large businesses or an increasing failure to crack down on small business is a moot point. It remains to be seen how HMRC react to this new information, but experience insists that small businesses may expect increased attention for the authorities.

The VAT gap

VAT represents 21% of the overall tax gap.

The VAT tax gap is 5.4%.

The absolute VAT gap is £7.6 billion.

The VAT gap has reduced from 14.0% of theoretical VAT liability in 2005 to 2006 to 5.4% in 2021 to 2022.

More than two thirds of the theoretical VAT liability was estimated to be from household consumption. The remainder came from the expenditure by businesses that supply goods and services where the VAT is non-recoverable (they are exempt from VAT), and from the government and housing sectors.

Information on the method used to estimate the VAT gap is here for those interested (I don’t imagine that there will be that many…).

So, £7.6 millions of VAT is missing. That seems an awful lot.

VAT Inspections – How do HMRC choose which businesses to visit and what is “Connect”?

By   2 May 2023
0

Big Brother is watching you…

It always used to be the case that “Control Visits” aka VAT inspections were decided by a business’

  • turnover
  • VAT complexity
  • business complexity
  • structure
  • compliance history
  • previous errors

The more ticks a business gets the more inspections it will receive. Consequently, a business with a high turnover (a “Large Trader”) with many international branches providing complicated financial services worldwide which has failed to file returns by the due date and has received assessments in the past will be inspected almost constantly. Tick only a few of the boxes and a sole trader with a low turnover building business will still generate HMRC interest if it has received assessments in the past or is constantly late with its returns.

These visits are in addition to what is known as “pre-credibility” inspections (pre-creds). Pre-creds take place in cases where a business has submitted a repayment claim.  HMRC will check whether the claim is valid before they release the repayment.  These may be done via telephone, email, or in person, and may lead to a full-blown inspection.

In addition, there was always a random element with inspections generated arbitrarily. The usual cycles were: six monthly, annually, three yearly, five yearly, or less frequently. On occasions, the next inspection would depend on the previous inspector’s report (they may, for instance, have recommended another inspection after a future event has occurred).

The Connect System

Although elements of the above “tests” may still apply, many inspections now are based on intelligence obtained from many sources. The main resource is a data system which HMRC call “Connect”. This system feeds from many bases and forms the basis of many decisions made by HMRC. Instead of HMRC relying on information provided by businesses on VAT returns, Connect draws on statistics from myriad government and corporate sources to create a profile of each VAT registered business. If this data varies from that submitted on returns it is more likely that that business will be inspected. As an example: HMRC obtains anonymised information on all Visa and MasterCard transactions, enabling it to identify areas of likely VAT underpayments which it can then target further. Other sources of information are: online marketplaces – websites such as eBay and Gumtree, as well as Airbnb can be accessed to identify regular traders who may not be VAT registered. Additionally, it can also access Land Registry records, so these can be checked not only to see what properties have been sold (and ought to have been subject to output tax) but what properties have been purchased (in order to determine whether a taxpayer is likely to be able to afford such properties).

The Connect system can also examine public social media account information, such as; Twitter, Facebook and Instagram using sophisticated mechanisms along with being able to access individual’s digital information such as web browsing and emails.

It is understood that less than 10% of all inspections are now random.

The £100 million plus Connect project is, and will be, increasingly important as HMRC is losing significant resources; particularly well trained and experienced inspectors.  With many local VAT offices closing there is also a concern on the ground that a lot of “local knowledge” of businesses has been lost.

Big Brother really is watching you…. And if you are on the receiving end of an inspection, there is a circa 90% chance that there is a reason for it!

For information on how to survive a VAT inspection, please see here.

I always suggest that if notification of an impending inspection is received a pre-visit review is undertaken to identify and deal with any issues before HMRC arrive and levy penalties and interest.

VAT: How claims are processed

By   2 February 2023
0

Further to my article on repayment interest, I thought it may be helpful if I looked at how HMRC process repayment returns, and what can delay payments.

Once a business submits a repayment return it is subject to a number of set steps:

  • Step 1

HMRC records the date a return is submitted online via MTD.

  • Step 2

Automated credibility checks are applied to all claims. HMRC say that most returns pass these tests. If this is the case, they proceed immediately for payment.

  • Step 3

Credibility queries (or “pre-cred” queries) – returns that fail the automated tests are checked manually and are either resolved by the credibility team, or sent to officers to carry out further investigation.

  • Step 4

Returns sent for further checks – HMRC say that high priority is given to these verifications and any queries are handled with the minimum involvement of, or inconvenience to, a business. Experience insists that this is not always the case.

  • Step 5

Credibility queries are returned to the credibility team – results of the officer’s action, including any amendments required, are returned with a certificate detailing the amount of time taken and any official delay. Claims are passed for payment.

  • Step 6

Payment of the claim – once a claim has been accepted, repayment is made immediately. HMRC’s systems check whether repayment interest is applicable. If it is, the interest is paid automatically at the same time as the repayment.

Commentary

Most issues usually arise when returns show “unexpected” repayments – eg; a business regularly submitting payment returns submits an one-off claim, or when a first return shows a significant repayment. The pre-cred checks are undertaken to protect the revenue, that is; to ensure that the claim is valid before money is released. Normally, these checks involve a request for copies of purchase invoices, a telephone conversation, or a physical visit by an officer. Not unreasonably, the quantum of the claim impacts significantly the way HMRC handle it.

However, delays can occur on both sides. A business will have to reply to all HMRC requests timeously (and this is in its interest) but more often a claim will be ‘lost” in the system, or inspectors take an unacceptable time to deal with queries. I have one claim that is still in the system after being lodged in January 2021, despite us providing all information requested immediately.

Reasons for unexpected repayments

There are a number of reasons why a return may be an unusual repayment, which include, but are not limited to a:

  • large one-off VAT bearing purchase, eg; machinery, computer system, or land/property
  • premises refurbishment
  • concentration of professional/advisory fees
  • large export order
  • change in business structure
  • new line of business
  • change of a product’s liability
  • change of government policy
  • new product launch

 

VAT: Updated guidance – Non-Statutory Clearances Service

By   21 July 2022
0

HMRC has published new guidance on the non-statutory clearance service available for all businesses and their advisers.

Non-Statutory clearances

A Non-Statutory clearance is a mechanism where a person can ask HMRC in writing for guidance or advice in certain circumstances. The guidance sets out how to use this procedure. The service is limited, however, and HMRC will only advise if the applicant:

  • has fully read the relevant guidance or contacted the relevant helpline
  • has not been able to find the information required
  • is uncertain about HMRC’s interpretation of tax legislation

However, HMRC will not respond if

  • it is not given all the necessary information —checklists at Annex D (for VAT) provide details of what is required
  • it does not think that there are genuine points of uncertainty – it will explain why HMRC think this and direct the applicant to the relevant online guidance
  • if  HMRC think the clearance request is to give tax planning advice, or to approve tax planning products or arrangements
  • the application is about treatment of transactions which, in HMRC’s view, are for the purposes of avoiding tax
  • HMRC is checking the applicant’s position for the period in question, in which case queries must be directed to the officer dealing with the inspection
  • it is a clearance on matters of fact, such as if certain activities constitute a business
  • there is a statutory clearance applicable to the relevant transaction

HMRC is currently not dealing with postal applications, so a request must be sent by email to nonstatutoryclearanceteam.hmrc@hmrc.gov.uk

HMRC will usually reply within 28 days, but say where difficult or complicated issues are involved it may take longer. If this is the case, HMRC will acknowledge a request and tell the applicant when they can expect a full reply. VAT non-statutory clearance requests are currently taking around 12 weeks to process.

Appeal

There is no general right of appeal against advice given by HMRC, except where rights to appeal are set out in statute.

Appeal rights are usually against decisions HMRC take, such as issuing an assessment for underpaid tax or a penalty.

However, some VAT related decisions are classed as ‘appealable decisions’ by statute. The letter HMRC sends will explain if the applicant is able to appeal and what to do if the applicant disagrees with a VAT decision.

Relying on HMRC advice

There has been changes to such reliance, set out here. HMRC explain when its advice is not binding here.

VAT Inspections …and how to survive them

By   5 January 2022
0

VAT Inspections

The first point to make is that inspections are usually quite standard and routine and generally there is nothing to worry about.  They are hardly enjoyable occasions, but with planning they can be made to go as smoothly as possible. As an inspector in my previous life, I am in a good position to look at the process from “both sides”.  If you are concerned that the inspection is not routine (for any reason) please contact us immediately.

Background

Typically, the initial meeting will begin with an interview with the business owner (and/or adviser) to go through the basic facts.  The inspector will seek to understand the business and how it operates and will usually assess the answers with specific tests (further tests will be applied to the records).  After the interview the inspector(s) will examine the records and will usually have further queries on these. More often than not they will carry out; bank reconciliations, cash reconciliations, mark-up exercises, and often “references” which are the testing of transactions using information obtained from suppliers and customers.  There are many other exercises that may be carried out depending on the type of business.  Larger businesses have more regular inspections where one part of the business is looked at each meeting.  The largest businesses have more or less perpetual inspections (as one would expect).  The length of the inspection usually depends on:

  • Size of the business
  • Complexity of the business
  • Type of business (HMRC often target; cash businesses, the construction industry, property investment, partially exempt businesses, charities and NFP entities, cross-border transactions and financial services providers amongst others)
  • Compliance history
  • Associated/past businesses
  • Intelligence received
  • Errors found
  • Credibility of the business owner and records

The above measurements will also dictate how often a business is inspected.

More details on certain inspections/investigations here

The initial inspection may be followed by subsequent meetings if required, although HMRC state that they aim is to conclude matters at the time of the first meeting.

The inspection – how to prepare

  • Ensure that both the person who completes the VAT returns and the person who signs the VAT returns will be available for all of the day(s) selected
  • Arrange with your adviser, to be available to you and the inspector on the days of the inspection
  • Thoroughly review your VAT declarations and have ready, if relevant, any disclosures or other declarations you consider you need to make to HMRC at the start of the inspection (this should avoid penalties)
  • Have available all VAT returns and working papers for the last four years or the period since you were registered for VAT including:
    • Annual accounts
    • The VAT account and all related working papers
    • All books and accounts, cashbook, petty cashbook, sales and purchases day books
    • Sales and purchase invoices
    • All supporting documentation, eg; contracts, correspondence, etc.
    • Bank statements
    • VAT certificate and certificate of registration
    • Any other documentation relating to “taxable supplies”
  • Have available the full VAT correspondence files ensuring that they are fully up-to-date
  • Ensure you have full information on any; one-off, unusual or particularly high value transactions

The inspection – during the visit

  • Ask the inspector(s) to identify themselves by name on arrival (they carry identity cards)
  • Be polite, friendly and hospitable as far as possible
  • Make a desk or space available for them to work near to you – in this way you can oversee/overlook what they do
  • Only allow access to the files that form part of your “VAT Records”
  • Enable the VAT inspector, if they ask, to inspect your business premises (and have someone accompany them)
  • Be cautious with your answers to seemingly “innocent” questions and comments. If in doubt ask for time to check, or that the question be put in writing (never guess or provide an answer which you think HMRC want)
  • If something inconsistent is found (or suggested) ask for full details and take note of all of the documentation to which the query relates – this will enable you to provide necessary information to your adviser

The inspection – at the end of the visit

The inspector should:

  • Explain the main work they have done. For example which VAT accounting periods they reviewed
  • Explain any areas of concern they have, discuss them and seek to agree any future action that needs to be taken; and
  • Illustrate as fully as possible the size and reason for any adjustment to the VAT payable, and describe how the adjustment will be made

You should:

  • Obtain a summary of the inspection from HMRC (not always an easy task)
  • Ask the inspector to put all of HMRC’s concerns about your business to you in writing
  • Confirm with the inspector all time limits for providing additional information to HMRC

After the inspection

HMRC will write to you confirming:

  • Any issues identified
  • Further information required
  • Improvements required to record keeping
  • Any corrections required
  • Whether VAT has been over or under paid
  • Any penalties and interest which will be levied
  • Deadlines for payment.

On a final point: Never simply assume that the inspector is correct in his/her decision.  It always pays to seek advice and challenge the decision where possible.  Even if it is clear that an error has been made, mitigation may be possible.

We can provide a pre-inspection review as well as attending inspections if required.  It is quite often the case that many HMRC enquiries may be nipped in the bud at the time of the inspection rather than becoming long drawn out sagas. We can also act as negotiator with HMRC and handle disputes on your behalf.