VAT has been under the care and management of the Commissioners of Customs and Excise since the Finance Act of 1972, which paved the way for its introduction, so VAT officers are officers of HM Customs and Excise.
Customs uses various methods to keep an eye on taxpayers - including assurance visits, which are designed to ensure that a business pays the correct tax at the correct time. There are also Miscellaneous Visits, which vary in frequency, although much use is made of phone, fax and e-mail to resolve queries where possible.
Large businesses do not necessarily raise the greatest risk from a compliance point of view, but simple innocent errors could result in very large underpayments of tax. Customs therefore have a large business control programme to address the greater revenue exposure that could arise from the larger companies. Such businesses are now subject to much closer control than their smaller competitors, from a specialist unit within Customs.
Because the assurance visiting programme is driven very much by perceived risk, some businesses will see Customs far more frequently than other businesses of a similar size. Indeed, some businesses may not see the VAT man for more than a decade - whereas even small businesses, which have a varied pattern of VAT returns or are prone to making errors on returns, may see Customs more than once a year.
There is a substantial amount of information available to Customs to determine which businesses should be visited most frequently. This ranges from a rolling analysis of the businesses own VAT returns, through comparison with industry norms extracted from Customs database, to information provided from other visits and from other sources.
Assurance Visits These are the main inspection visits at which Customs form a view on the reliability of a businesses records and the level of risk it appears to represent. They will examine the records looking for any errors to ensure that the correct amount of tax has been paid.
It is important to recognize that it is the correct amount of tax they are seeking to determine, not the maximum amount of tax. That said, the checks applied by Customs are geared to identifying if tax has been underpaid, rather than establishing if tax has been overpaid.
On an assurance visit the officer will firstly want to discuss the nature and operation of the business with someone in suitable authority. They will then want to examine the accounting records and often other ancillary records, which may form part of the audit trail for the business activities.
This may be a diary, order or quotation records, customer correspondence file or other non-financial records. The visit will probably focus on three separate aspects: first, the accuracy of the basic records; second, comparability with outside information; and finally, overall credibility.
The first of these is self-evident; the latter two may bear some further explanation. For comparability with outside information, Customs will almost always review the final or audited accounts of the business, which have been prepared by an independent professionally qualified person, and will seek to compare these to the VAT returns.
In addition they will often have some cross-references detailing sales or purchases from other businesses with which the business they are inspecting has dealt - these may also include observations made by other Customs officers who have observed the business. The third type of check is to look at the overall credibility of the business.
This can vary from a simple lifestyle review to a detailed mark-up exercise looking at the margins that should be achieved by the business from its purchases - both those which it has declared and those of which Customs may have become aware.
If the officer is satisfied at the end of the visit that the records are in order, he should confirm this and the business may hear no more from Customs for several years. If the officer has concerns or has identified errors or mistakes during his inspection he should explain these at the end of his visit and advise what action may be required to put matters right. If he has identified underpayments of VAT, an assessment, which will probably attract an interest charge and may attract a penalty will, be issued in due course.
Miscellaneous Visits There are a number of reasons why Customs may visit a business outside of the assurance visiting programme. These include checking an unusual return, verifying a repayment claim, seeking information about another business, chasing up unpaid VAT or seeking to establish that the business is registered for VAT. Most visits will be made by appointment, but very occasionally they will be unannounced.
Customs are conscious of the time and cost, both for the taxpayer and themselves, which making a visit can take. They will often try to resolve what appears to be a simple query about a business or more probably about a specific VAT return by telephone and by exchange of documents by fax or e-mail.
They have also embarked on two alternative programmes to obtain assurance about the accuracy of VAT returns. One of these is to call for copies of the audited or final accounts of the business, request the completion of a questionnaire and then carry out a review without visiting the business. The other is to ask the business to conduct a self-inspection, this again involves the completion of a questionnaire, but the review of the VAT returns is carried out by the business or by its advisers.
One of the more recently introduced types of visit is the VAT avoidance visit. Over the past few years Customs have developed a VAT avoidance team of officers whose task is to seek out businesses that have implemented VAT-saving schemes, and to challenge the operation of these schemes. The new legislation, which was introduced from 1 August 2004, requires businesses that have implemented certain listed schemes or have entered into arrangements that have the hallmarks of avoidance, to notify this to Customs. This will undoubtedly lead to visits from the avoidance team.
Perhaps the final and most feared category of visit is the investigation visit or raid. This will occur when Customs have specific information, which leads them to suspect that a business has been evading VAT or is involved with someone else who is evading VAT. This will almost certainly be unannounced and may be accompanied by a search of premises, supported by a search warrant, and in extreme circumstances may be supported by a police presence.
Steve James is an associate director with Chiltern Plc, one of the largest tax advisory practices in the UK. He can be contacted on 020 7153 2415 or at firstname.lastname@example.org.