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HMRC VAT Enquiries Explained

by Thomas Nock Martin | Feb 07, 2021 | VAT

HMRC VAT enquiries

Summary. Businesses primarily dealing in cash transactions, like cafés and stallholders, face increased HMRC VAT enquiries due to perceived risks. HMRC uses advanced tools to compare business records with expected figures, flagging discrepancies. If under scrutiny, maintaining accurate records and consulting an accountant are crucial for addressing any disparities.


With 2021 in full swing we are very much living in a digital world, with the online possibilities seemingly endless. However, there are some businesses where cash is still the primary transaction means.

These businesses face more scrutiny from HMRC and are more prone to HMRC VAT enquiries due to their high risk status. But what are the justifications and causes for VAT investigation? And how can you respond to them if challenged?


Small businesses such as stallholders, cafés and takeaway food outlets are examples of the types of business still making substantial cash transactions. Some may even be cash only. Because of this HMRC are more likely to initiate a VAT compliance check. The reason being either by mistake or design, cash transactions are less likely to be recorded accurately.

HMRC has very diligent methods of checking. Therefore, if you are a cash business it’s in your favour to know the rules and play by them.

Models & Data Used for HMRC VAT Enquiries

When it comes to HMRC VAT enquiries, HMRC will compare your records with its extensive data on profit margins, turnover, mark-ups and more. HMRC has significant tools, data and time to investigate businesses in depth. It uses clever software to identify apparent differences between figures in a business’s accounts and those it expects to see for the type and location of your business.

Of course, discrepancies aren’t evidence of dishonest behaviour, simply a signal to look deeper. However, it is a red flag, especially if your business takes a lot of cash. 

HMRC Compliance Checks for a Small Business

HMRC might be proactive and take immediate action, or they may take a different approach and wait until a later date to look at investigating further. 

If they do decide to take immediate action HMRC might carry out a thorough observation of your premises. For example, in the case of a pub or bar, VAT officers will count the number of customers and, wherever possible, how each customer pays. Multiple visits will be made to get an accurate conclusion of how your business runs.

HMRC do not have to announce their visit. They can ask you to offer sales records and other information, showing sales for a specified period to compare with their observations. However, it’s important to note that you don’t have to provide documents or information at this point. You are within the law to politely refuse and say that you’re happy to cooperate, but wish to consult your accountant first.

How to Handle Discrepancies

The conclusions that HMRC officers draw from their VAT enquiry are trusted and viewed accurate enough for HMRC to make their case. However, from a business perspective there could be any number of legitimate reasons why your takings may not marry up to the observations by the VAT officer. A margin for human error has to be taken into consideration. Therefore, if you are investigated and discrepancies apply consider the following: 

  • consider if there were reasons why their observations regarding the level of trade or cash taken might not be representative. For example, you were running a sales promotion at the time.
  • check its workings for basic errors such as the hours of business, incorrect mark-ups, not accounting for shrinkage, etc;

Keep Accurate Records

Your best defence is good record keeping. However, even if you have nothing to hide it’s advisable to speak to your accountant before handing over any documentation.

If you have systems in place for checking cash sales against the cash deposits, HMRC is more likely to budge on their findings. Keep track of all outgoings so that you can easily account for any differences.

Thomas Nock Martin | Small Business Tax Specialists

We are specialists in small business tax UK, which means we can offer the right guidance for your circumstance. If you’re looking for guidance on HMRC VAT enquiries, then call us today on 01384 261300. Alternatively, you can visit our website for more information. Let us help your business. 

You may also want to read up on VAT Partial Exemption | Do You Know What You’re Entitled To?


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