A VAT inspection is HMRC checking that the returns you have filed match the records behind them. Most are routine, many conclude without an assessment, and the ones that go badly usually go badly for reasons that had nothing to do with the underlying VAT position — poor records, guessed answers, and a business that treated the visit as an argument rather than a review.
Why you were selected
Selection is largely risk-driven rather than random. The common triggers are recognisable from the outside: repayment returns, particularly a first one or a sudden change in pattern; ratios that sit outside the norm for your trade sector; a large one-off input tax claim; inconsistency between VAT returns and filed accounts or corporation tax computations; late or amended returns; a trade with known risk profiles such as construction, motor, catering, property or anything involving significant exports; and third-party information, including data HMRC receives from other tax authorities, marketplaces and financial institutions.
None of these means anything is wrong, and it is worth saying plainly: being selected is not an accusation. But the trigger usually tells you what the officer intends to look at, which is the most useful piece of preparation available.
The powers behind the visit
HMRC's information and inspection powers sit in Schedule 36 to the Finance Act 2008. In outline, an officer may issue an information notice requiring documents and information reasonably required to check your tax position, and may inspect business premises, business assets and business documents. An inspection normally comes with at least seven days' notice; it can be unannounced where the officer's authorisation or tribunal approval supports it. Private areas of a home are not open to inspection in the same way.
The sanctions for non-cooperation are specific. Failure to comply with an information notice, or deliberate obstruction of a tribunal-approved inspection, carries an initial penalty of £300, followed by daily penalties of up to £60 for continued failure, with a further tax-geared penalty available where the failure is prolonged and significant. These are rarely reached, because the practical cost of stonewalling — an officer who now assumes the worst and assesses accordingly — arrives long before the penalty does.
What they actually look at
The substance of a typical visit is narrower than businesses fear:
- Output tax completeness — whether all supplies were captured, correctly rated, and in the right period. Zero-rating and exemption claims get the closest attention, because that is where the money is;
- Input tax evidence — whether every reclaim is supported by a valid VAT invoice addressed to the business, and whether the expenditure is genuinely for business purposes. Entertainment, motor expenses and anything with a private element head the list;
- Partial exemption and private use — the calculations behind them, and which method is being applied. The standard method needs no approval; a special method may not be used or changed without HMRC's written agreement, and the officer will ask to see it;
- Reverse charge and cross-border supplies — place of supply, evidence of export or removal, and the domestic reverse charge in construction;
- Digital record-keeping — whether the Making Tax Digital requirements are actually met, including digital links between systems rather than a spreadsheet copied by hand;
- Reconciliation — VAT returns against the nominal ledger, and the ledger against the annual accounts. Unexplained differences are where most assessments begin.
Assessments, penalties and time limits
If the officer concludes VAT has been underdeclared, HMRC raises an assessment. Where records are inadequate, that assessment can be made to "best judgement" — an estimate built from whatever evidence exists, which is almost always less favourable than a figure you could have supported yourself. Challenging a best judgement assessment means producing the records you should have had; the burden lands squarely on the taxpayer.
VAT has its own assessment time limits, and they are not the four/six/twenty ladder used for income tax and corporation tax. The ordinary cap is four years from the end of the prescribed accounting period, and careless errors sit inside it; the limit extends to twenty years only in specified cases — deliberate behaviour, failure to notify a liability to register, and the other categories set out in section 77 VATA 1994. Penalties are behaviour-based: nothing for a genuine mistake made despite reasonable care, up to 30% for carelessness, 20% to 70% for deliberate understatement, and 30% to 100% where it was deliberate and concealed. Within each band, an unprompted disclosure attracts a much lower penalty than a prompted one — which is the entire argument for correcting an error you have found before the officer finds it.
Handling one well
The behaviours that separate a clean outcome from a difficult one are consistent. Prepare: reconcile the return periods under review to the ledger and the accounts before the visit, and find your own errors first. Appoint one point of contact so answers are consistent. Answer what is asked, in writing where the question is technical, and never guess — "I'll confirm that this afternoon" costs nothing, while a wrong answer given confidently becomes the officer's working assumption for the rest of the review.
Disclose known errors up front. Be realistic about what that buys, though: a disclosure is unprompted only where you had no reason to believe HMRC had discovered, or was about to discover, the error — so once an inspection letter has arrived, volunteering the point is usually a prompted disclosure. It still earns the maximum reduction available within the prompted band, and it changes how the officer reads everything else. The genuinely unprompted disclosure is the one made before any contact. Keep a note of what was asked and what was provided. And take advice early where the amounts are material or the behaviour question is live — the point at which behaviour is characterised as careless or deliberate is where the real money is decided, not in the arithmetic.
Acumon handles inspections and enquiries through VAT investigation and HMRC tax investigation work, and runs a VAT health check for businesses that would rather find the problems before HMRC schedules a visit. If a letter has already arrived, the useful work happens in the weeks before the officer does.