Being prepared for a VAT inspection

If you are preparing for a VAT inspection then you will want to be sure they have the right paperwork ready. This includes invoices to back up any VAT you have reclaimed, but can HMRC demand this VAT back if they don’t have them?

VAT evidence

One of the first things you learn when you start in business is to have paperwork to back up every purchase. Not only will your accountant want this, but HMRC pays close interest as well, particularly when it comes to VAT. During an inspection it will check a sample of purchase transactions to see that they’re genuine and that you have the proper paperwork to go with it. However, contrary to popular belief, this doesn’t mean you always need a full VAT invoice.

Small purchases

For purchases under £250 a less detailed invoice will do; till receipts for fuel purchases, for example. Plus, for cash expenses like parking meters and pay phones no paperwork is needed at all. But you will need to keep a record, e.g. an expenses claim form, so you can reclaim the VAT. However, what’s the position where you don’t have a full VAT invoice for larger purchases?

HMRC has the discretion to allow a claim for input VAT where you have other evidence to prove you made a purchase on which VAT was payable. If it refuses and you think it’s being unreasonable, you can appeal against the decision.

Other evidence

HMRC’s statement SP 7/2003 explains when a business can reclaim VAT without having a VAT invoice. This says other suitable evidence can include but isn’t restricted to:

  • a purchase order
  • delivery notes
  • payment records
  • records of the onward sales of the purchased items
  • transport invoices/insurance

Ideally, you should at least know the supplier’s VAT number.

Additional information

HMRC might not be satisfied with the alternative paperwork alone. They are suspicious by nature and will want to make sure that the supply was actually received. For example, by looking at the bank records to find a corresponding payment or evidence of how the goods/services have been used or sold on by the business.

Invoices etc. not in your name

Another common misunderstanding is that purchase invoices etc. must always be in the name of the business reclaiming the VAT. This is not correct. For example, where one of your workers pays for something on behalf of your business and the invoice etc. is in their name you can still reclaim the VAT. This is because the worker was acting on your behalf when they made the purchase; it was not for them personally. As long as you reimburse them you can reclaim the VAT.