The worst has happened and you find yourself on the receiving end of a VAT assessment from HMRC in the UK.  This might arise for a variety of reasons but essentially a VAT assessment will usually be triggered by the following:

• A VAT audit where HMRC determine there is a VAT error;
• As a result of a ‘precred’ query on a VAT repayment return – an error is discovered and it is found to relate to earlier VAT return periods in addition to the one subject to the ‘precred’ check;
• Following submission of an Error Correction Notice (ECN) to HMRC where an amount of VAT is due to HMRC

This article will outline best practice to help you walk through some of the key considerations in reviewing HMRC VAT assessments.  Where there are areas of uncertainty, The VAT Consultancy can provide advice and help.

How far back can VAT assessments go?

In the UK the ‘statute of limitations’ for VAT errors is 4 years.  This means that errors both in the taxpayers favour and HMRC’s favour can go back up to 4 years but no further.  This means 4 years from the end of the VAT return period in which the error arose for under-declared output VAT and over-claimed input VAT, so 4 years back from the current VAT return period.   On a practical level HMRC’s systems are not able to accept data for periods prior to this.

Where an issue is disputed and discussions with HMRC are ongoing, it is common practice for HMRC to issue a ‘protective assessment’ to stop time periods falling foul of the 4 year cap outlined above.  This means they raise and issue assessments for the early periods whilst the discussions are ongoing so that, in the event they win the argument or they disagree with the taxpayer and proceed to raise an assessment, the early period VAT is not lost.  Normally they do not expect payment of the assessments during ongoing discussions, hence the moniker ‘protective assessment’ – to protect them from losing out on assessing earlier period VAT if discussions are protracted.

NB their desire to ensure VAT is not lost under these provisions does not override their requirement to ensure assessments are only raised using ‘best judgement’.  This means they should not raise assessments unless they are in possession of full facts and accurate data.

VAT Assessments following VAT Audits

A VAT assessment arising following a VAT audit may or may not be contentious.    What we mean by this is that errors can arise as a result of mis-postings, transposition of values etc, leading to under-declarations of VAT and there is usually no dispute as to whether an error has been made in this case.  It does not matter that the customer would have recovered any VAT had it have been charged, HMRC will still likely want to raise an assessment, sticking to a mantra that the right amount of tax must be paid by the right person at the right time.  See below regarding interest on assessments.

If a VAT audit results in a dispute whereby you do not agree with HMRC about the treatment of a particular type of transaction, you should be given the opportunity to continue making a case as to why additional VAT is not due before they raise an assessment (subject to the point above regarding the 4 year cap).

Once they make their final decision however this should be notified to you in writing and this becomes the formal ‘appealable decision’ which should be accompanied by an assessment schedule showing how much VAT is due per period plus details of any interest due.

VAT Assessments following submission of repayment VAT returns

HMRC frequently carry out mini desk audits on VAT returns showing larger than usual repayments, or on the first VAT return submitted by a newly VAT registered business if it shows a repayment due to the taxpayer.

During this process they will typically request confirmation of the business activities and copies of the 10 largest (by value) sales and purchase invoices.   They also request copies of the VAT return workbook and sales/purchase listings for the period.   If they discover errors during this process, if the error is confined to the VAT return they are reviewing, they will amend the VAT return values, reducing the repayment, and no assessment documentation will be issued.  NB you are still able to appeal this decision if you disagree, as set out above.

However in some cases the error discovered may have also arisen in earlier VAT return periods.  In this case HMRC will ask for the relevant data and raise an assessment for the earlier periods.

VAT Assessment following submission of an Error Correction Notice (ECN)

This scenario should not be contentious as such given the assessment is issued by HMRC following receipt of an ECN from the taxpayer.  Therefore, provided the values agree, there should not be a dispute.

When must a VAT Assessment be paid?

VAT Assessments must be paid within 30 days of the date of issue which should be shown on the front page of the assessment, typically top right corner in a box with a date stamp.  If making payment this will cause an issue for the business this should be discussed with HMRC as soon as possible so that a ‘time to pay’ arrangement can be reached if necessary.  Otherwise they will issue demand letters and ultimately may visit business premises to collect the VAT debt.  You should consult a VAT specialist if you need help with this.

If the business continues to submit repayment returns after the issuing of an assessment HMRC should not offset the assessment VAT against your repayment return if you are trying to arrange ‘time to pay’ with them or if you are still in the review period in relation to the decision.

Default Interest

Interest will be shown on the assessment documentation on sums due to HMRC, but if repayments are due from HMRC in the same period, the interest should only be due on the net value due to HMRC.

Historically HMRC did not impose interest penalties in situations where a taxpayer did not charge VAT to a customer in error but if they had charged VAT, the customer would have fully reclaimed this, meaning there would be no loss of VAT to HMRC.  This changed from January 2023 and interest is now charged.

Key things to review/check on VAT assessments

It is worthwhile checking the following key points if a VAT assessment is raised to ensure it is accurate:

• Was the assessment issued in due time (there are specific and fairly complex rules whereby HMRC have 12 or 24 months to raise assessments following receipt of full facts)? If you feel you provided all of the required information to HMRC and it took them more than 1 year to issue the assessment you should discuss the issue with a VAT specialist.
• Has any default interest been calculated correctly?
• Are the VAT values on the assessment correct and in the correct periods?

What should you do if you do not agree with the VAT Assessment?

If you do not agree with the technical basis for the VAT assessment the ‘decision letter’ should set out your rights of appeal.  The time limits applying should be adhered to if possible, so if you would like the HMRC decision to be reviewed by an independent officer, this should be requested within 30 days of the date of the decision.  If they uphold the original decision to assess, you then need to decide whether to lodge a formal appeal to a VAT tribunal within 30 days and also consider whether Alternative Dispute Resolution (ADR) – mediation – may be possible (it is typically less formal or costly than a tribunal).

The VAT Consultancy has extensive experience in helping clients determine whether a VAT assessment has been fairly issued or whether there are grounds to appeal the decision.

The VAT Consultancy is highly experienced and provides relevant and practical advice to help you deal with the pre and post VAT audit. We provide global VAT and customs duty advice and VAT compliance services.  To discuss how we can help contact us today or call us on +44 203 2806902.