Tag Archives: assessment

VAT Inspections …and how to survive them

By   5 May 2017
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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.

Latest from the courts: missing goods subject to VAT

By   13 October 2016
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In the CJEU case of Maya Marinova the issue was whether goods which could not be located in the Bulgarian appellant’s warehouse were subject to VAT on the grounds they had been disposed of.

Background

The appellant purchased certain goods, and subsequently, at an inspection, was unable to either;

  • produce the goods , or;
  • demonstrate how they were disposed of.

The Bulgarian authorities had confirmed that the goods had been purchased from a supplier, but the purchases did not appear in the business’ purchase records. They assessed for VAT on the missing goods assuming that they had been purchased and sold off record and the output tax had not been accounted for. They employed a mark-up exercise based on similar goods sold in the appellant’s shop.

The case proceeded directly to the court without an AG’s opinion.  The matter was; whether the decision to assess offended the principle of fiscal neutrality if it were supported by national legislation (which it was here).  It was decided that in these circumstances, such action was not precluded and the assessment was basically sound.  It was stated that “… tax authorities may presume that the taxable person subsequently sold those goods to third parties and determine the taxable amount of the sale of those goods according to the factual information at hand …”.  As usual, the case was passed back to the referring court to consider whether the Bulgarian domestic legislation goes further than is necessary to ensure the correct collection of tax and to prevent evasion.

Commentary

Although the issues in this case arose from specific facts, this is not an uncommon scenario for a business.  It was hardly a surprising outcome.  In a similar position in the UK, HMRC is also very likely to form the view that if the goods are no longer on hand, then they must have been disposed of, unless evidence to the contrary is provided by a taxpayer.

Of course, there may be a genuine reason why the goods are no longer in stock, but no output tax has been declared on them.  These reasons are considered in guidance published by HMRC here and the rules mainly consider goods which have been lost, stolen, damaged or destroyed.

There are specific ways of dealing with VAT in these situations, and in fact, whether output tax is due at all.  Failure to comply with this guidance may result in an assessment being issued.   The general point is VAT is only due after a tax point has been created.  A crude example is that if goods are shoplifted from a store, there is no output tax due.  However, if the goods were sold and recorded via a till, and the money which went into the till was stolen, output tax is still due on the supply of those goods (as found in the case of G Benton [1975] VATTR 138).

As always with VAT, it is crucial to keep accurate and up to date records to evidence supplies (as well as recording the movement of stock and any discrepancies in these circumstances).  Although an inspector will need to demonstrate “best judgement” in issuing an assessment in respect of missing goods, it is obviously prudent to be able to demonstrate why the anticipated output tax has not been declared and therefore be prepared for such enquiries.

In this instant case, it was not discovered why the goods were not located in the warehouse.  It could be that there was a miscommunication between parts of the business, a simple underdeclaration of sales, staff theft, or any other hazards of business.  Even for non-tax reasons it is vital that a business’ systems are sufficiently robust to identify such occurrences and procedures are put into place to deal with them.

If you or your clients have received an assessment of this sort, it is usually worthwhile obtaining a review of the position.