HM Revenue & Customs (previously HM Customs & Excise) officers have, for the present, different legal powers for VAT than the Taxman, these being granted under the Value Added Tax Act 1994. They have the right of entry on to business premises, the power of inspection (not search) of those premises which sell goods (as opposed to services), the power to demand documents and records pertaining to taxable transactions, to take copies from or remove those documents for a reasonable period (a receipt must be given if removed). All these powers must be used reasonably.

Over the years the VATman has verified the accuracy of VAT returns by the use of an inspection regime, called control visits. However, these are not as common as they were a few years ago, the VATman seemingly preferring to concentrate on an office based risk review of the credibility of figures submitted, including a business economics review, and those returns which seemingly fail to look correct and credible being selected for further enquiry, either by use of the telephone, correspondence, or a VAT inspection. Although an inspection is not an actual investigation, nevertheless, the unfortunate taxpayer selected for a visit could find the officer is proposing to raise an assessment for back VAT using a ‘mark up’ exercise based on gross profit percentages, or a ‘parts and labour’ exercise based on proportions of categories of goods bought and sold, to name a couple of techniques.

If a taxpayer feels that a VAT inspection is moving away from a normal ‘inspection of the records’ towards an assessment it will be important that they should seek advice from their accountant or a specialist as soon as possible, especially if the records are removed. Upon a revisit, for instance, the officer may well conduct an in-depth interview to try to establish matters such as profit levels, wastage, goods bought and diverted for other business purposes (such as drink bought in a pub/restaurant and diverted to be used in the cooking), stock levels, levels of theft and whether theft is from the till or of stock (if from the till they will assess for the VAT as a taxable transaction will have occurred).

It will be extremely important that the taxpayer does not hazard a guess at any estimates, as once a figure is proffered this will be used in any subsequent assessment. If the taxpayer does not know, he/she should simply tell the officer and suggest that an exercise will be conducted over the next few weeks to establish the level of wastage/diversion or whatever. Even if pressed by the officer, the taxpayer must never guess, as it will be nigh impossible to alter this figure subsequently, even on appeal. Once an officer raises an assessment to the best of his/her judgement, the onus is on the taxpayer to disprove that assessment - which can be quite a formidable task!

Obtaining proper estimates may well result in the reduction or even cancellation of an assessment raised to the best of the officer’s judgement, and specialist assistance can help in such a matter.

In serious cases of suspicion of VAT fraud, the VATman also has the power to obtain a search warrant and enter premises, by force if necessary, and conduct a full search of those premises, probably removing all records for examination and evidential purposes. These sorts of visits are, thankfully, relatively rare and only conducted by the trained investigators of the department, not the local VATman, although some of these people may be used in a support or assistance role. If a taxpayer finds him/herself on the receiving end of a search and investigation, specialist legal and VAT help needs to be obtained immediately, and in particular during any interview which will, at that stage, generally be made under a formal caution.