Tax Returns & VAT Inspections

An important part of any business’ financial year is the production and completion of tax returns and any possible VAT inspections which may occur as a direct result.

Filling out Tax Returns

It is important – especially if you are a sole trader – that you fill out and return your tax returns as soon as possible. Many individuals find themselves falling behind with such things which leads to the issuing of fines for late filing by Her Majesty’s Revenue and Customs.

A tax return is designed to give Her Majesty’s Revenue and Customs (HMRC) an accurate picture of how much you make and how much you spend in order to do so. When you spend money you will often pay VAT on the purchases you make and this money can be claimed back especially if you are in the first year of business; this is called ‘Making a VAT Reclaim’

VAT Reclaims

If you are in the first year of business you may be spending more than you are making so you are eligible for what is referred to as a ‘VAT Reclaim’; this means that Her Majesty’s Revenue and Customs (HMRC) will give back some or all of the amount of VAT you have spent on stock and services you have used in order to run your business.

A good example of this would be the company that has bought ten computers but only sold four; the company would be liable to pay the Value Added Tax (VAT) on the four they have sold – especially if they are VAT registered – and could claim the VAT back on the six they did not sell.

For VAT reclaims this equation applies: if you buy more than you sell then you are entitled to money back from Her Majesty’s Revenue and Customs (HMRC) but as always it is best to seek advice and guidance from your accountant with such am application.

VAT Inspections

Most businesses will be allowed their first VAT reclaim providing the amount they are reclaiming is not wholly unacceptable. You may find that during the course of your first year you have made three or four reclaims because most businesses in their first year tend to spend more in set up costs etc than they make. Her Majesty’s Revenue and Customs (HMRC) are sympathetic to this and will not penalise you unnecessarily.

It is worth noting that if you continue to make VAT reclaims you may be liable to a visit from a tax inspector who will ask to see all of your company’s books and accounts as well as details of all your invoicing and how you pay suppliers etc. You should always ensure that your accounts, invoicing, payroll and credit control systems are up to date and that an inspector has access to all of this information on the day of his or her visit.

A perhaps silly – but nonetheless valid piece of advice – is not to offer a tax inspector lunch while they are on your premises. To many this may sound like a harmless act meant as a professional courtesy but it can be misconstrued as an act of potential bribery.

You should also ensure that if a tax inspection is taking place that the inspector has an office in which to sit on their own and that a member of staff is on hand to field any questions or provide any background information that may be necessary.

You should also be aware that asking the inspector how you faired is also frowned upon and no answers or information as to the outcome of the inspection will be given verbally. A detailed report as to the nature of the inspector’s findings will be sent to you in due course.

Where possible try to ensure that your company accountant is present on the day – HMRC will give you plenty of notice – and that all information and paperwork is properly filed and stored in accordance with their wishes.