What Causes VAT Investigation, and How Can You Avoid It? 

November 21, 2022

If you’re a business owner in the UK, you know that value-added tax (VAT) is a fact of life. Every time you sell a product or service, you must charge VAT and remit it to the government. It’s a simple enough process until something goes wrong.

If HM Revenue & Customs (HMRC) suspects that you haven’t been paying your fair share of VAT, they may launch an investigation. This can be a time-consuming and expensive process, not to mention the potential penalties if HMRC finds that you have indeed been underpaying.

What Causes a VAT Investigation?

There are several different reasons why HMRC may launch a VAT investigation into a business. The most common reason is incorrect or missing VAT returns, but investigations can also be sparked by:

  • Anomalies in your VAT records: If your VAT returns don’t match up with the information in your accounting records, HMRC may want to take a closer look as they assume that you’re trying to hide something.
  • Large discrepancies between your VAT returns and those of similar businesses: If your business is reporting much lower profits than others in your industry, HMRC may assume that you’re not declaring all of your income.
  • A tip from a disgruntled employee or competitor: If someone raises suspicions about your VAT payments, HMRC will likely investigate.
  • A random HMRC audit: Occasionally, HMRC will select businesses at random for an audit.
  • Inaccurate or incomplete VAT returns: If your VAT returns are missing information or contain errors, HMRC may launch an investigation.
  • Claiming excessive VAT refunds: If you claim a large VAT refund, HMRC may want to ensure that everything is up and up.

How Can You Avoid a VAT Investigation?

There are a number of steps you can take to reduce the risk of being investigated by HMRC. These include:

  • Making sure your VAT returns are accurate and complete: This may seem like a no-brainer, but it’s one of the most common reasons for an investigation. Double-check your VAT returns before submitting them to ensure that all of the information is correct.
  • Keeping good records of your sales and purchases: If HMRC suspects that you’re not declaring all of your income, they may ask to see your sales and purchases records. Make sure these are up-to-date and complete.
  • Staying on top of your VAT payments: If you’re late in paying your VAT, HMRC may investigate to see if you’re trying to avoid paying. Make sure you pay your VAT on time, every time.
  • Using a reputable accountant or tax advisor: A good accountant or tax advisor can help you ensure that your VAT returns are accurate and complete and that you’re paying the right amount of VAT.
  • Reporting any suspicious activity to HMRC: If you suspect someone is trying to defraud HMRC, report it to the authorities. This can help prevent an investigation into your own business. 

What to Do If You’re Under Investigation?

If you do find yourself under investigation, it is important to cooperate with HMRC and provide them with any information they request. You could face severe penalties, including a fine or even a prison sentence, if you do not.

If you’re being investigated, consider hiring a VAT investigation specialist in the UK. They can help you navigate the investigation process and ensure that you’re providing HMRC with everything they need.

Conclusion

VAT investigations can be a stressful and time-consuming experience, but there are steps you can take to reduce the risk of being investigated. By ensuring your VAT returns are accurate and complete, keeping good records, and staying up-to-date on your VAT payments, you can help avoid an investigation. If you do find yourself under investigation, it’s important to cooperate with HMRC and seek professional help.

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