What is a VAT Compliance Check?

If you’re a VAT-registered business, there’s a chance you may one day be subject to a VAT compliance check. These reviews are HMRC’s way of ensuring your business is managing VAT correctly, including whether you’ve been reporting VAT accurately, paying the correct amounts, and following all the (many) relevant rules. 

HMRC conducts these checks for businesses of all sizes and industries. They can be routine or triggered by specific factors like discrepancies in VAT returns, significant changes in business operations, or tips regarding non-compliance.

For most businesses, the thought of any inspection from an official body can feel like you’re already in trouble, but it’s worth remembering that these are a standard part of the tax system and most businesses that have been operating in good faith will come out of a compliance review unscathed.

In this article, we’ll break down how VAT compliance checks work, why they happen, and how you can prepare to make the process as smooth as possible.

How does a VAT compliance check work?

When HMRC selects your business for a VAT compliance check, they’re essentially looking to confirm that:

• Your VAT returns match your financial records.
• You’ve claimed only legitimate VAT refunds.
• Your VAT payments have been made in full and on time​​.

(Need more information on paying your VAT bill? Check out our guide here.)

What to expect during a VAT compliance check

Here’s how a typical VAT compliance check unfolds:

1. Notification: HMRC will usually notify you in advance of a visit. This gives you time to gather the required records, which might include invoices, receipts, VAT returns, and bank statements. However, HMRC does have the right to make unannounced visits in certain situations, particularly if they suspect fraud or significant errors​​.
2. On-site visit: An HMRC officer will visit your premises to inspect records and may ask questions about your VAT processes. They’ll likely focus on areas like sales, purchases, and how you’ve calculated VAT on your transactions. If you operate in an industry with complex VAT rules—like international trade, hospitality, or construction—they might dig a little deeper into sector-specific compliance​​.
3. Post-check report: After the visit, HMRC will issue a report summarising their findings. If everything checks out, no further action is needed. But if they identify errors, underpaid VAT, or non-compliance, you may be required to make corrections, pay any outstanding VAT, and possibly face penalties​​.

Why do VAT compliance checks happen?

HMRC selects businesses for VAT compliance checks for various reasons. Some of the most common triggers include issues with the returns themselves, a history of unreliable submissions, industry factors or, sometimes, random chance.

• Unusual VAT returns: A sudden spike or drop in your VAT liability can raise red flags.
• Mistakes in past submissions: Errors or inconsistencies in previous VAT returns might prompt further scrutiny.
• Industry-specific risks: Certain industries—such as e-commerce, hospitality, or construction—often deal with more complex VAT regulations and may face higher scrutiny.
• Random selection: Sometimes, it’s simply your turn. HMRC also conducts random compliance checks as part of its broader efforts to reduce VAT fraud​​.

Other red flags mentioned on HMRC’s website include entering figures on a VAT return that appear incorrect, making a large VAT refund claim despite low turnover, or declaring a small amount of tax while reporting high turnover.

Why is VAT compliance important?

HMRC is taking an increasingly tough stance on VAT investigations, with the number of checks growing 23% 2022-2023, alongside introducing stiffer penalties and higher interest rates on non-payment. If HMRC finds mistakes or non-compliance during a check, the consequences can include:

• Financial penalties: Errors, even if unintentional, can result in penalties. For deliberate errors or fraud, the fines can be severe.
• Reputational damage: Being flagged for non-compliance can hurt your reputation with suppliers, customers, and other stakeholders.
• Business disruption: A compliance check often requires time and resources to address, which can pull you away from running your business​​.

Preparing for a VAT compliance check

If you’ve been notified of a VAT compliance check, you can minimise disruption by preparing the necessary records and processes in advance.

1. Keep your records organised

Ensure all your VAT-related documents are up-to-date and easily accessible. This includes:

• VAT returns and calculations.
• Sales and purchase invoices.
• Bank statements showing VAT payments.
• Evidence for VAT reclaim, such as receipts​​.

The simplest way to manage all this is with a digital record system that contralises your documents and transactions, supported by an experienced accountant.

2. Review your VAT returns

Take some time to double-check your previous VAT submissions for errors or inconsistencies. If you spot a mistake, let HMRC know before the compliance check begins. Voluntarily disclosing errors can reduce potential penalties​​.

3. Seek professional help

Given the importance of VAT management, working with a VAT specialist or accountant can make a big difference. They can help you prepare for the check, identify potential issues, and represent you during HMRC visits​​. They can also support you with systems that will minimise your chance of being reviewed in future. 

How long does a VAT compliance check take?

The length of a VAT compliance check varies depending on the complexity of your business and any issues HMRC identifies. 

A straightforward review might take a few hours, while more detailed checks could last several days or even weeks. The timeline also depends on how quickly you can provide the records and information HMRC requests​​.

What to do if HMRC identifies errors in your VAT return?

If HMRC identifies underpaid VAT during a compliance check, you’ll be required to pay the outstanding amount, plus interest. 

You may also face a penalty, which depends on the nature of the error (e.g., accidental vs deliberate). However, voluntarily disclosing mistakes or cooperating fully can reduce the penalties​​.

How to cover an unexpected VAT bill

If it turns out that you owe more than you thought, coming up with the cash can be a major strain on your cash flow, especially if HMRC demands immediate repayment. If you’re in a tight spot, a VAT loan can provide quick access to funds so you can meet your tax bill without disrupting your business.

iwoca’s Flexi-Loan is a flexible, fast financing option to support your working capital needs, whether you’re dealing with an unexpected tax bill or looking to invest in growth.

• Quick access to funds: Get funds within 24 hours to pay your VAT bill on time.
• Flexible repayments: Tailor repayments to fit your cash flow needs with the ability to overpay or pay off the loan early and save on interest with no fees.
• Control and transparency: Only pay interest on what you draw down and top up once you’ve repaid a percentage of your loan.

Find out more about our small business loans here.