An HMRC VAT inspection that ends without an assessment does not necessarily mean HMRC has approved your VAT treatment. HMRC may subsequently take a different view and assess VAT retrospectively, potentially going back four years. The business could also face interest and a penalty for a careless error.
Recent VAT cases provide an important warning for CEOs and CFOs. They also demonstrate why businesses should protect themselves when adopting a VAT treatment involving significant amounts of money. The cases leave businesses with two different but related messages:
- HMRC silence after a VAT inspection is not necessarily HMRC approval.
- HMRC having previously inspected the business does not, by itself, demonstrate that the business took reasonable care over its VAT accounting.
That is why we are increasingly helping businesses identify material VAT positions before they become disputes, document the technical basis for the treatment being adopted and quantify the potential downside if HMRC subsequently takes a different view.
Does an HMRC VAT inspection mean HMRC has approved your VAT treatment?
Not necessarily. In Realreed, HMRC had inspected the company’s VAT affairs on several occasions over many years. HMRC’s officers knew that the company’s main supplies were being treated as exempt from VAT and performed partial input VAT recovery calculations that were based upon that treatment. HMRC nevertheless subsequently decided that the supplies should have been subject to output VAT and issued assessments exceeding £4.8 million for the preceding four years. On 26 June 2023, the High Court rejected Realreed’s argument that the earlier HMRC inspections prevented HMRC from issuing those assessments.
The judgment emphasised an important principle: the responsibility for getting VAT accounting right rests with the business. HMRC’s role is not to certify every aspect of a company’s VAT treatment during a VAT inspection. Indeed, before one inspection, HMRC expressly warned that its officer would not normally have time to examine every aspect of the business and that the company should not assume that all its records had been checked and approved. Realreed had neither asked HMRC for a formal VAT ruling nor received any written assurance upon which judge thought the company could rely.
What if HMRC actually says it agrees?
The Abbey Group First-tier Tribunal decision delivered on 13 October 2026 provides an even stronger warning. During a VAT inspection, an officer apparently told the company’s finance director: “OK, I am satisfied with the treatment.” The Tribunal accepted that the comment concerned the particular VAT treatment that HMRC subsequently challenged. Nevertheless, Abbey was unable to prevent HMRC from assessing the VAT.
For a business to establish a ‘legitimate expectation’ that HMRC will stand by something it has previously said, the hurdles are high. These include a clear and unqualified written assurance, made after the taxpayer disclosed to HMRC all of the relevant facts and documents. Even then, Abbey demonstrates that this may not prevent HMRC applying what it subsequently considers to be the correct VAT treatment retrospectively. The Tribunal regarded it as significant that Abbey had received a short verbal assurance rather than a reasoned written ruling or formal clearance.
The practical message is simple: Do not assume that a HMRC VAT inspection which ends without an assessment, or even an apparently favourable discussion with an HMRC officer, protects the business against a future VAT assessment. Where the amounts are significant, considerably greater protection is needed.
Can HMRC also charge a careless error penalty?
Potentially, yes. This is where Realreed provides a second important lesson. The First-tier Tribunal asked whether Realreed itself had taken ‘reasonable care’ to establish the correct VAT treatment. In its decision issued on 15 December 2023, the Tribunal found no evidence of considered professional VAT advice being sought or a documented internal VAT analysis being undertaken. The finance director had not researched the legislation, HMRC guidance or relevant cases. Instead, the business had relied upon its historic treatment and its understanding of previous HMRC VAT inspections.
As the Tribunal explained, the crucial issue was not how difficult the VAT question was but how much effort the business had made to establish the right answer. Getting a difficult question wrong despite properly investigating it is very different from making an assumption without adequately checking it.
HMRC’s own guidance supports that distinction, stating that no penalty is due where an error occurs despite the taxpayer having taken ‘reasonable care’. One example given by HMRC is where a business acts on advice from a “competent adviser” which later proves to be wrong, provided that the adviser was given a full set of accurate facts. That is an important protection.
How we are helping businesses to protect themselves
Rather than waiting until they are faced with a retrospective VAT assessment, interest and penalties, we are helping businesses address these risks before a potential HMRC challenge arises during a future VAT inspection by focusing on the two solutions below.
1. Protecting against ‘careless error’ penalties
Where a business has adopted, or is considering adopting, a VAT treatment that involves uncertainty or significant amounts of money, we can review the position and provide a written opinion on the appropriate VAT treatment. This creates contemporaneous evidence that the business identified the VAT issue, actively considered it and sought specialist advice rather than simply making an assumption.
Importantly, HMRC’s own guidance recognises that a penalty should not be due where a business acts on advice from a competent adviser (ie a specialist VAT adviser rather an accountant) which later proves to be wrong, provided that the adviser was given a full set of accurate facts.
Our work therefore involves:
- understanding the commercial arrangements and VAT treatment being applied;
- reviewing the relevant contracts and other supporting documents;
- considering the relevant VAT legislation, HMRC guidance and case law; and
- providing a written opinion that the business can retain with its VAT records.
There is no guarantee that HMRC will ultimately agree with that opinion. However, if HMRC challenges the treatment several years later, the business is in a much stronger position to demonstrate what it considered, what information it provided to its adviser, what advice it received and why it adopted the VAT treatment it did. That can be particularly important when defending against a subsequent HMRC allegation that the business made a ‘careless error’ and tries to levy a penalty for not taking ‘reasonable care’.
2. Protecting against future VAT assessments
Written advice cannot eliminate the possibility that HMRC will take a different view. We are therefore also helping businesses to quantify and manage its potential future financial exposure where a material VAT risk remains. This can include calculating the potential VAT cost exposure that could build up if HMRC subsequently challenges the treatment and assesses for it plus the associated interest and potential penalties.
Once the potential exposure is understood, we can help the business consider an appropriate risk-management strategy. For some businesses, that may mean establishing a ‘rainy day fund’, so that money is accumulated towards the potential cost of a future HMRC assessment rather than an unexpected VAT liability creating a substantial financial problem several years later.
Where the potential exposure is particularly significant, we can also help businesses explore whether appropriate tax liability / dispute insurance may be available. Depending on the cover offered and the policy terms, insurance may provide another way of managing some of the financial exposure associated with a future HMRC assessment, interest and penalties, together with the professional and legal costs of challenging HMRC through the tax tribunals and courts.
The objective is not necessarily to eliminate VAT risk. In many areas that simply is not possible.
Instead, we help businesses understand the risk, document why they have adopted their VAT treatment and put appropriate financial protection in place should HMRC challenge that treatment in the future.
Is your business prepared for an HMRC VAT challenge? Get expert advice on your VAT position and potential exposure. Contact Mark Ellis, VAT Partner.
