VAT compliance checks: what they involve and insuring the cost

VAT scrutiny starts from the outset

Unlike an Income Tax or Corporation Tax enquiry, which follows a filed annual return, VAT scrutiny can begin at any moment of a VAT-registered business’s existence — from registration onwards. Repayment returns attract attention. Sector patterns attract attention. The rolling quarterly rhythm of VAT means there is always a recent return to look at, and a compliance check can examine systems and records as much as any single figure. For a business, that means the question is less “will we ever hear from HMRC about VAT” than “what will it cost to deal with properly when we do.”

What a compliance check involves

A VAT compliance check typically means HMRC reviewing returns and the records behind them: sales and purchase invoices, the treatment of particular supplies, partial exemption workings where they apply, and the systems that produce the figures. Checks may be conducted by correspondence or by visit. The professional work is in preparing — reviewing the position before HMRC does, assembling what will be asked for, being present and useful during a visit, and dealing accurately with the follow-up. Done well, that work shortens checks; done on the cheap, it lengthens them.

When a check becomes a dispute

Many checks close without adjustment. Others surface a disagreement — over the liability of a supply, the recoverability of input tax, the operation of a scheme — and become disputes, argued through correspondence, reviews and sometimes beyond. VAT disputes are technical and precedent-heavy, and the fee clock runs through every round. The Solar Protect cover treats VAT compliance checks and disputes as insured events, so the accountancy fees of both the check and any dispute that grows out of it are within the cover’s scope, up to the policy limits.

Records powers: Schedule 36 inspections

HMRC’s formal information and inspection powers under Schedule 36 Finance Act 2008 apply to VAT as they do to direct taxes: documents can be required, business premises and records can be inspected. Responding to a formal notice correctly — understanding what is validly in scope, assembling it, reviewing before disclosure — is professional work the policy covers, and up to £250 is included for informal HMRC information requests besides.

The carve-out that matters: Section 60 and 61

Sections 60 and 61 of the VAT Act 1994 concern VAT evasion involving dishonesty — Section 60 for the business, Section 61 allowing penalties to be attributed to directors or managing officers. The Solar Protect cover includes Section 60/61 enquiries provided there is no dishonesty or fraud: an honest business facing an allegation it disputes has cover for its professional defence fees, but actual dishonesty is uninsurable, here as everywhere in insurance. The same principle applies to the cover for Code of Practice 8 investigations. It is worth being clear-eyed about this boundary: fee protection funds the honest taxpayer’s defence; it is not, and cannot be, a hedge against fraud.

Keeping the cost of compliance insurable

For most VAT-registered businesses the practical takeaway is simple. The tax itself is either due or it is not — that is a matter for your returns and your accountant. The professional cost of demonstrating your position to HMRC, however, is a genuine insurable risk, and one that arrives unannounced. Cover through Solar Protect — part of our group — can be bought online in minutes, provides up to £100,000 of accountants’ fees with no excess, and lets you use your own accountant, who already knows how your VAT position is built. For the full list of insured events beyond VAT, see the tax fee protection hub; for why enquiry fees mount the way they do, see HMRC investigation costs.

Frequently asked questions

What triggers a VAT compliance check?

Checks can be risk-based — repayment returns, sector patterns, inconsistencies in the data HMRC holds — or simply part of HMRC's routine compliance activity. A check is not an accusation, and VAT-registered businesses can be checked at any point from registration onwards.

Does the cover include HMRC visits as well as correspondence checks?

VAT compliance checks and disputes are insured events under the Solar Protect cover, and Schedule 36 Finance Act 2008 record checks and inspections are specifically included. The policy wording sets out exactly how each applies.

What are Section 60 and 61 of the VAT Act 1994?

They deal with VAT evasion involving dishonesty — Section 60 penalties on the business, Section 61 attribution of penalties to directors or managing officers. The cover includes such enquiries only where there is no dishonesty or fraud: an honest defence is insurable, dishonesty itself is not.

Will the policy pay VAT that HMRC assesses as due?

No. Fee protection pays professional fees only — VAT due, interest and penalties are never insurable. Whether an assessment is right is a question for your accountant.

We already pay our accountant a fixed annual fee — isn't this included?

Usually not. Fixed fees typically cover compliance work — returns and accounts — not the open-ended correspondence, records work and meetings a check or dispute generates. Ask your accountant where their fixed fee stops; that boundary is what fee protection insures.

Solar Protect is a trading style of Solar Insurance Services (Medway) Limited, authorised and regulated by the Financial Conduct Authority (FRN 459582), and is part of the same group as Apex Insurance Brokers.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This page is general information, not advice on a specific policy.