February 16th, 2015 / Insight posted in The Sunday Times Business Doctor

Come clean on errors before VAT inspection

BC writes: I have received a letter from HM Revenue & Customs about a routine visit to check that my VAT returns have been prepared correctly. I am concerned that they will find some errors because a number of my bookkeepers over the past 18 months have made mistakes. I also recently discovered that VAT was claimed incorrectly on some entertaining costs. What should I do?

VAT visits vary in complexity, depending on the type of business and how many transactions it has, writes Jon Dawson, partner at Kingston Smith LLP. They can often be conducted in a few hours, unless serious errors are discovered.

The best way to prepare is to make your VAT records available to the inspector along with copies of submitted returns, supporting calculations and access to invoices. This may be difficult with your succession of bookkeepers, so prepare early. HMRC may also want to talk about the structure of the business with you at the outset.

You can correct any VAT errors under £10,000 on your next VAT return or, for larger businesses, up to 1% of the output sales amount, to a maximum of £50,000.

You should amend any known errors before the visit if you have a VAT return to file beforehand. If not, the best approach is to be transparent and provide a comprehensive list of corrections, which may result in a reduced penalty. Errors disclosed after a visit is arranged or during an inspection will be treated as having been “prompted”, which may incur higher penalties.

If the errors cannot be corrected on the return, you will need to make a voluntary disclosure on form VAT652.

You should put processes in place for identifying the correct amount of VAT in future and make sure your accounting team understands them. As the business owner, you should check the calculations before VAT returns are submitted and document your review.