What HMRC Actually Reviews in VAT Inspection & Why

This guide explains what HMRC looks for during a VAT compliance check, why your business may be selected and which records you may need to provide. It also covers common VAT mistakes, HMRC’s powers, possible penalties and the practical steps you can take to prepare, so you know what to expect if HMRC comes knocking.

HMRC carries out VAT compliance  to confirm that businesses are paying and reclaiming the correct amount of VAT. Most checks are risk-based, although random checks can also happen. HMRC may investigate where returns contain inconsistencies or other signs that something needs closer examination. 

VAT repayment claims can attract extra scrutiny, with HMRC carrying out credibility checks before releasing some repayments. There is no fixed inspection cycle, so being selected for a VAT audit does not automatically mean HMRC believes you have done anything wrong. 

A VAT audit, VAT inspection and VAT compliance check all broadly refer to the same thing: HMRC reviewing your VAT position to make sure the right amount of VAT has been reported, paid or reclaimed. HMRC usually calls this a compliance check, while advisers and businesses may use terms such as “VAT audit” or “VAT inspection”, so do not be concerned if the wording on your letter is different.  

 A VAT repayment credibility check works the same way but happens specifically before a repayment is released, so HMRC can confirm the reclaim is correct before paying it out. During a compliance check, HMRC may review your VAT records and supporting evidence and, if it finds an error, consider whether you took reasonable care when preparing your VAT returns, which can affect any penalty charged.

During a VAT compliance check, HMRC will usually compare your VAT returns with the records that support them. This can include your VAT account, sales and purchase invoices, and bank statements. HMRC may look more closely at sales where no VAT was charged, larger input VAT claims and whether bank receipts match the income reported in your records. The normal VAT assessment time limit is four years, although HMRC can look back further in certain cases, including up to 20 years where deliberate behaviour is involved. 

Worked Example: A Developer’s DRC Repayment Claim Under Review 

A VAT-registered property developer is acting as contractor on a build. In one quarter it takes £300,000 (before VAT) of standard-rated work from its subcontractors, all of it caught by the Domestic Reverse Charge. The subcontractors issue invoices with no VAT added and the note "S55A VATA 94 applies." The developer accounts for the VAT itself. Then the return lands showing a repayment far bigger than usual, and everyone starts worrying HMRC will come knocking. 

Here is what that return actually looks like: 

The bit most people miss: the £60,000 washes straight out. It goes into Box 1 as output tax and comes back through Box 4 as input tax on the same return, so the reverse charge itself moves no cash. The £40,000 repayment comes entirely from the developer's ordinary input VAT sitting against little or no output VAT, because it isn't charging its subcontractors and, being mid-build (or selling zero-rated new homes), has no VAT-bearing sales to set against it yet. 

And here is the part worth knowing.  The reverse charge is designed to push some contractors into a repayment position, because they stop collecting output VAT from customers on the affected supplies — contractors in this position can move to monthly VAT returns to get the money back sooner. A repayment here is the design working, not a red flag. 

What decides whether HMRC releases the £40,000 has nothing to do with how big the number is. It comes down to evidence: subcontractor invoices carrying the correct reverse-charge wording, proof the subcontractor were VAT and CIS registered, and input VAT that is genuinely recoverable. That last one catches developers out. If any of the project's onward supplies are VAT-exempt (most residential lettings, or the sale of an existing dwelling), the partial exemption rules may restrict how much of that £100,000 is recoverable unless the exempt-related input tax falls within the de minimis limits and reclaiming the full amount when you're not entitled to it is what invites an assessment. 

Illustrative figures only. The £40,000 is not an HMRC review threshold. The reverse charge applies only where all the section 55A VATA 1994 conditions are met, and full recovery depends on the developer making taxable supplies. 

How long a check takes depends mostly on what turns up and how quickly you deal with it, because HMRC works to no set timetable. A straightforward visit to your premises is often done in a day. A more complicated one can stretch across two to four days on site. Repayment reviews, which a large VAT reclaim tends to prompt, are usually the drawn-out ones, running for weeks as records and questions pass back and forth. The best thing you can do is stay on top of it: reply quickly, send what's asked for, and don't let the letters pile up. 

If HMRC finds a VAT error, they’ll issue a section 73 VATA 1994 assessment to recover the tax, plus late payment interest from the date the VAT was originally due. Whether you also get a penalty depends on your behaviour and when you disclose. 

• If you took reasonable care, there’s no penalty even if you’re wrong. 
• If you were careless, the penalty is 0–30% if you tell HMRC before they have reason to find it, but 15–30% if they discover it first. 
• If the error was deliberate but not concealed, it’s 20–70% if you disclose first, or 35–70% if HMRC finds it. 
• If it was deliberate and concealed (you tried to hide it), it’s 30–100% if you disclose first, or 50–100% if HMRC finds it. 
  

A disclosure is “unprompted” only if, at the time you tell HMRC, you have no reason to believe they’ve already spotted, or are about to spot, that specific error. It doesn’t matter whether a formal enquiry has opened; what matters is whether you knew they were onto that issue. Disclosing before that point keeps you in the lower penalty ranges; once HMRC has clearly flagged the error, any disclosure is “prompted” and the minimum penalties rise. Full cooperation can reduce the figure within the range, but the cheapest outcome is always to flag the error yourself before HMRC has reason to believe it exists. 

Under MTD for VAT, HMRC requires a clear digital journey through the software forming your electronic account. Once transaction data is recorded there, transfers between relevant software must generally use digital links. Manual re-keying or copy-and-paste between those systems does not meet the digital-link requirement. 

Spreadsheets remain acceptable, but they must be properly connected where digital links are required. During a compliance check, HMRC can examine electronic records, underlying transaction data and system processes to test how figures reported on a return were produced. 

The practical message is clear: your VAT figures should be supported by a compliant digital trail, not a process that depends on manually moving data between accounting systems. 

Before an HMRC VAT compliance check, review your digital VAT trail to make sure the return reconciles with the VAT account, invoices and underlying records. Where relevant, check Domestic Reverse Charge (DRC) treatment and ensure option-to-tax decisions, notifications and supporting documents are complete and easy to access. 

If you identify an error before HMRC is about to discover it, correcting and disclosing it promptly may qualify as an unprompted disclosure and reduce potential penalties. Once a check has started, full cooperation can still affect the level of any penalty reduction. A specialist review can help uncover issues early, while UK Property Accountants’ HMRC Enquiries service can review your VAT position and represent you throughout the compliance check.