How to avoid a VAT inspection

Happy New Year to one and all! If your resolutions included “avoid VAT inspection”, then boy! Have we got a late Christmas present for you!

In all seriousness, it’s that time of the year when most self-employed people have tax on the mind. Check back in with us over the next few weeks for info on the self-assessment penalties you’ll want to avoid, and in the meantime, feast on the nuggets of advice we have for you in the article below.

As a small business owner, your first reaction to a VAT inspection will probably be something like, “AARGH!” You’re doing nothing wrong, and you’re busy, but his is going to take up precious time and come with costs attached. Say it again, this time with feeling:”AARGH!” Fortunately, there are a few practical ways to minimise your chances of this happening.

Don’t give them cause for concern

A small percentage (7-10%) of businesses are chosen at random, as part of a deliberate strategy to keep entrepreneurs on their toes. However, most inspections happen when something doesn’t quite stack up, either in your figures or your back story. HMRC routinely runs checks comparing your return to the sector average, and unusual fluctuations will be flagged up. The best way to prevent an enquiry? Don’t give them cause for concern in the first place.

Be right on time

HMRC puts a lot of stock in punctuality. If you’re on time with VAT returns and other paperwork, they’ll assume you’re generally A-OK. But being late indicates disorganisation in the ranks. Missing the initial deadline for paperwork counts for the vast majority of investigations.

Make things easy for yourself by setting up direct debits for payments. Automate and back up your admin systems to avoid input errors. Sweat the small stuff. Car expenses, staff entertainment and business/non-business apportionment are where VAT errors, however unintended, often occur.

Anticipate, anticipate, anticipate

Anticipating VAT questions and being ready with answers will save you time and money. If there are sudden changes to your business model, or anomalies in your turnover or profit, explain them clearly on your VAT form. Check that your annual turnover agrees with your four quarterly figures, and find out if there’s more income in your bank accounts than is reflected on your sales invoices.

Bear in mind that your VAT return also paints a picture of your lifestyle – if profits or drawings are low, what are you living on? How did you afford that car? If there was new money in the business, where did it come from?

Learn the lingo

Grey areas and technical issues will inevitably be a focus for any investigation. Make sure you understand different terms and their tax implications correctly. If you’re writing off invoices as bad debt, double check that they really are bad debt and not just errors from when the invoices were created.

Be contactable by post

Avoid virtual office addresses, and if you use a third party street address make sure your post is not returned to HMRC. They might terminate your registration and could even charge you with claiming VAT illegally.

The luck of the draw

You should expect to have an inspection once every seven years, so it might just be your turn. Don’t sweat it too much – although it’s a stressful process, in the long run, it’ll strengthen your administrative systems and help you figure out how to keep on top of things.

Get a trustworthy accountant

OK, so you knew we were going to make this suggestion, but seriously – an accountant that stays on top of the latest info and keeps you informed is worth their weight in gold (be sure to declare it!) If you’re concerned about how to avoid a VAT inspection, or you simply want to get your finances in order, give My Accountant Friend a call. We’ll go through the tough stuff, so you can focus on growing an honest and profitable business instead.

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