The first step to remaining friendly with the VAT inspector is to understand the basics of the paperwork required. The second step is to ensure accurate financial records are maintained. At the very least you should be able to produce an audit trail to support the financial figures entered on the quarterly tax return.
Typically inspectors will examine the totals for several quarterly tax returns compared with the total sales turnover and total expenditure to assess if the returns are accurate. In addition cash and bank accounts may be examined to determine if payments and receipts reflect the scale of financial transactions.
It is quite normal for the inspector to select the most recent vat return to audit plus a second quarterly return submitted in the previous 12 months and potentially a third quarter from a period in the previous 2 years.
Several sales invoices and purchase invoices will be selected by the inspector for tracing through the debtor and creditors accounts to ensure that customer or supplier has also entered the same transaction into their financial accounts.
It is normal practice to cross check with third parties. It is likely that the inspector will have details of transactions from third parties which he expects to find recorded in the business vat accounts being inspected.
Should errors be discovered after the quarterly return has been submitted which total less than £2,000 the correction can be made on the next available quarterly tax return. If an error exceeding £2,000 pounds is discovered the customs and excise office must be informed in writing
It is normal practice for your accountant to help you prepare for a visit from the tax man. If you do not have an accountant – you will need to acquire on quickly!