Are You Prepared for a VAT Compliance Review?

By Hilary Oldham, Senior Consultant at Chartergate Legal Services

There is no easy way to determine how HMRC selects a business for a “routine” VAT compliance review. In the past, most businesses could expect a VAT inspection roughly every four years. However, as there has been increasing pressure on HMRC’s resources, that is no longer the case.

From observation, it would appear that priority for visits is given to businesses operating in sectors where HMRC considers fraud to be rife. This includes the labour and construction sectors.

Priority may also be given to businesses operating in sectors where the VAT rules are particularly complex, such as food, construction and health. The size and complexity of the business itself may also be a factor, as this can increase the likelihood of HMRC finding an error of significance to the Exchequer.

This article picks up on some key areas that are commonly addressed by HMRC in a VAT compliance review.

Due Diligence Undertaken on Supply Chains

The predominant focus of this topic is, as we have stated previously, on supply chains involving the making of, or receiving of, labour supplies. The greater emphasis is usually on the latter.

CIS Rules

Supplies that are under the CIS rules now also need in-depth due diligence on the supply chain. This is a consequence of the new HMRC guidance on measures to prevent fraudulent avoidance of paying CIS, brought in from 6 April 2026. We discussed this in our article earlier in April. Although that guidance is not connected with VAT, much of the due diligence work will cover both taxes.

Compliance Reviews

At a compliance review for a business which receives, or makes, supplies involving labour, HMRC will most likely ask to see records of due diligence. This includes due diligence undertaken at the start of a new business relationship and updates made at appropriate intervals.

Due Diligence Records HMRC May Expect to See

The due diligence should be adequate in scope. It should also include responses to any queries that arose and clear records of the results, along with copies of the documents obtained. Good records not only save a lot of time by cutting down the questions and further documents requested by HMRC during the review. They also provide helpful protection against the chance of HMRC raising assessments under the “Kittel” principle.

This applies where HMRC believes the taxpayer knew, or should have known, that there was fraud in the supply chain, should that prove to be the case.

Treating Supplies With the Correct VAT Rate and Correct Invoice Treatment

A compliance review will ask about, and look at, sales invoices to check the VAT liability attributed to supplies.

Checking Non-Standard VAT Rates

HMRC will check that, where a supply is not standard rated, the correct application of zero rating, reduced rating, or exemption from VAT has been applied.

Supplies Outside the Scope of UK VAT

Where relevant, HMRC will also check that the supply has correctly been treated as outside the scope of UK VAT. This is often as a result of the place of supply rules.

Exempt Supplies Under Review

Particular attention will be given by HMRC to exempt supplies. These may include, among others, property rentals and supplies of health, welfare, or labour where the nursing agencies concession is used.

Partial Exemption and Input Tax Recovery

HMRC will check that the exemption is correct and that the partial exemption rules have been applied to the recovery of input tax.

Domestic Reverse Charge Checks

If supplies involve construction services, there may well be queries from HMRC and checks on the application of the Domestic Reverse Charge (“DRC”). This may happen irrespective of whether the VAT due has been paid over to the Exchequer by one of the parties.

HMRC may also check the correctness of the detail on the VAT invoices issued.

Purchase and Sale of Assets and Sundry Sources of Income

It will be normal in a compliance review for HMRC to ask at the outset about all income streams. HMRC will also ask specifically about the sale and purchase of assets.

Sales Side

On the sales side, checks will be made on the correct VAT treatment. This is particularly relevant in connection with the sale of land and property, and the sale of motor cars. HMRC will also check that the VAT invoices raised meet the applicable regulations.

Purchases Side

On the purchases side, checks will be made on whether the purchase falls within the Capital Goods Scheme. This may include property purchased, or improvements to property, that cost £250,000 or more. HMRC will also check whether the taxpayer is entitled to any input tax recovered.

Where a business, or a viable part of it, has been purchased, HMRC will check whether the VAT rules relating to a transfer of a going concern have been applied correctly.

Aged Creditors

One of the areas frequently overlooked by taxpayers is the need to repay input tax to HMRC on purchase invoices where the creditor has not actually been paid. This applies where the due date for payment has passed the six-month milestone.

It can be somewhat time-consuming, or difficult to achieve with any degree of accuracy, to work out what should have been paid over in each VAT period in the past four years. This is particularly the case if this adjustment has not been done on each VAT return.

As a result, the taxpayer may have to accept assessments made by HMRC on an estimated basis.

Recovery of Input Tax

Input tax can only be recovered on business purchases that relate to making onward taxable supplies.

Compliance Reviews

A compliance review will undertake checks on business-versus-non-business purchases. It will also check whether input tax has been recovered in error against onward supplies that are exempt from VAT.

Tax Recovery Areas

Other areas of input tax recovery that are frequently checked as part of a compliance review include supplies of motor vehicles, such as purchase, contract hire and hire purchase.

Fuel and Entertainment Checks

HMRC may also check fuel for motor vehicles. In particular, it will look at whether the business has adequate records to support claims that the fuel is for business use, as opposed to private use. Subsistence claims and entertainment are also commonly reviewed.

Care should be taken to have adequate records and documentation to support all claims to recover input tax.

Conclusion

The areas listed above are not comprehensive. However, they highlight key topics that we have seen raised in recent VAT compliance reviews. There are clear benefits for a business in being well-prepared in these key areas ahead of a compliance review.

For example, any corrections proposed by HMRC are likely to be of a smaller financial magnitude. Any penalties levied for errors may also be suspended. The administration time taken up by the review is also likely to be reduced.

If you would like assistance or advice in any area of VAT, including the areas mentioned above, or would like Chartergates to undertake a “mock” VAT compliance review and report back to you on any areas of weakness, please contact hilaryoldham@chartergates.com.

Find out more information on our VAT Consultants Services page.

Disclaimer

Chartergate Legal Services Ltd has drafted this blog update to provide you with a general overview of the relevant law and developments at the date of sending only.

This blog is provided as a general overview and should be taken as such. It is not a substitute for professional advice that is specific to your circumstances and should not be relied upon as such.