You have probably noticed that the UK’s public finances are not in great shape at the moment. In November 2025, we had a budget containing tax rises (if you haven’t caught up with that, you can read our key takeaways of the Autumn Budget).
It looks like HMRC are feeling the pressure and are taking a harder stance on enforcement and compliance action to try to increase revenue. Over the past year we’ve seen a marked rise in random VAT enquiries from HMRC. For now, VAT seems to be the main focus of HMRC’s effort, but it’s fair to assume this stricter stance will spill into other areas of tax in time.
If you’re VAT registered or considering VAT registration, it’s worth understanding what’s going on and what HMRC as asking for.
Firstly, there’s no need to panic!
All this might seem intimidating and a little frightening. No one wants to be investigated by HMRC. VAT is possibly the most complex tax you’ll deal with. It has multiple, complicated rules, depending on what you sell and who you sell to. This tends to mean it’s the tax where the most innocent mistakes occur. But please do not worry, if you’re a Maslins client, we’ll support you through the initial stages of investigation, helping you collate information. For straightforward enquiries, this support is part of our service. However, if the investigation becomes more complex, we may need to charge additional fees for any extra work involved. Plus, we’ve detailed exactly the kinds of information HMRC are asking for, so you can be even more prepared.
What’s HMRC’s focus?
HMRC are drilling deeper into VAT reclaims and the evidence behind them. Specifically, that are looking at ‘input tax’ – tax terminology for the VAT your company pays when it buys something, like a laptop from a (VAT registered) company.
VAT receipts are essential
The VAT you’ve paid on these business purchases can only be reclaimed if you hold a valid VAT receipt. HMRC are now checking these more rigorously than we’ve seen before. Payment confirmations, booking emails or screenshots won’t cut it, HMRC are explicitly asking for full VAT invoices, and they want them for every reclaim. If you’re not sure what a valid VAT receipt should look like, you can read more in our guide to VAT receipts.
Personal use
For VAT, HMRC are now taking a stricter view on personal use. Take that company laptop we mentioned above, if there is any personal use, you are expected to adjust your reclaim proportionally.
A real-life example of a HMRC VAT enquiry
To help you understand the types of information and detailed questions HMRC are asking, we’ve included snippets from some communications between HMRC and a client. (Company names and amounts have been changed to retain client anonymity.) Throughout the process Maslins helped our client respond to, and answer, all the questions. Many of the reports requested by HMRC with detailed breakdowns can be downloaded from FreeAgent.
HMRC’s email is strongly worded and requests a significant amount of information. It was received on 29 October and gives the client just nine days to gather together a large amount of information. Working together we achieved this. In this client’s case, a VAT refund was received. HMRC’s letter contained a classic HMRC answer which informed the client that “on this occasion no errors were found.”
The focus in the first two points is on VAT invoices and apportioning a ‘realistic’ percentage to personal use.
In point 3 a ‘detailed VAT report’ is requested. In point 4, despite acknowledging that the anomaly between the bank reconciliation and the VAT return could be due to the client using the invoice basis, the inspector still asks for ‘evidence’ to account for the anomaly.
Point 5 is a genuine error and shouldn’t have been reclaimed. It’s important to take care when dealing VAT on a foreign transaction. Usually, no UK VAT is charged, so there is nothing to reclaim.
Point 6 again asks for a ‘valid’ VAT receipt and clearly states an email confirmation is not acceptable. It also questions the legitimacy of this stay and asks for details on the business purpose of the trip.
HMRC query about VAT invoices
HMRC query about VAT invoices
A different client underwent a VAT enquiry. The expense reclaims inspected were perfect. However, HMRC flagged up this anomaly:
The client was issuing invoices through Stripe, which automatically pulled through the product name, instead of the company name. Technically, that doesn’t meet VAT invoice requirements, but it’s an easy mistake to make when using third-party software. The client (like most people) was unaware of the fine print in the VAT invoice rules.
Importantly, there was no incorrect VAT reclaim and no VAT missing from the invoices. HMRC were challenging the format of the invoice, not the numbers.
In this case, we advised the client to push back politely and explain that reissuing all invoices in the format HMRC requested wasn’t commercially practical.
Should you be VAT registered?
If the turnover of your business is above £90k, the answer is yes, you have to be. If the turnover is below £90k, voluntary VAT registration brings plenty of benefits, and for most businesses it remains the right choice. That said, with HMRC stepping up their scrutiny, it’s even more important to keep good records.
If you do end up facing a VAT enquiry, here’s what that usually means in practice:
- You’ll need to speak with an HMRC compliance officer, either by phone or email. We can help prepare responses and handle parts of the process, but HMRC will expect to hear from you as the business owner or director.
- You’ll be asked to provide valid VAT receipts to support any reclaims. Having these ready makes the whole process smoother.
- You may have to explain the purpose of certain costs, for example, who you met for a business lunch or why a particular purchase was needed.
- If HMRC identify errors, they will seek repayment of any underpaid VAT, along with interest. They may also apply a penalty, depending on the behaviour that led to the error. Penalties can range from up to 30% for careless errors, to up to 70% for deliberate errors, and up to 100% where HMRC consider the error to be deliberate and concealed.
Flat Rate Scheme (FRS)
For several years, we’ve generally not recommended the Flat Rate Scheme (FRS) to newly VAT-registered clients. However, if the increased scrutiny around VAT reclaims makes you want to avoid reclaiming altogether, and you’re comfortable with the possibility of paying a bit more VAT overall, the FRS may be worth another look.
Under the FRS, you don’t reclaim VAT on most purchases. Instead, you charge 20% VAT as normal, but only pay HMRC 16.5% of that amount (15.5% for the first year).
Switching to the FRS doesn’t guarantee you won’t face a VAT enquiry, but because the scheme limits the amount of VAT that can be reclaimed, it may lower the chances of HMRC examining future VAT returns quite so closely.
Read more about The Flat Rate VAT Scheme
Actions to take
In summary, we would advise you to consider the following when thinking about VAT from now on.
- Get a valid VAT receipt for every company purchase and upload this to FreeAgent.
- If you don’t have a receipt, or you simply want to err on the cautious side, set the VAT rate to 0%. FreeAgent automatically assumes 20% for certain categories, so you’ll need to change the VAT rate.
- Keep notes on where you were and why the expense was incurred. This gives you the evidence you need if HMRC ask you to justify a reclaim. Helpfully, you can add these notes directly to FreeAgent in the description box of the transaction.
- Make use of the FreeAgent mobile app, including SmartCapture, which allows you to scan receipts and automatically extract the key information. This makes keeping records up to date far easier.
- There are also other tools that integrate with FreeAgent and can help streamline record keeping. If you’re using something already (or have come across a tool you think could be useful) please let us know!
If you receive a VAT enquiry
If you receive a VAT enquiry, the most important thing is to stay calm. An enquiry doesn’t automatically mean anything is wrong, many are opened at random, and HMRC are currently reviewing more returns.
Before replying to HMRC, speak to us. We can help you understand what’s being asked, gather the right information, and make sure any response is clear, accurate and proportionate. A calm, well-structured reply at the outset can make a real difference to how smoothly the process runs.
If you’re a Maslins client, we’ll help you at every step of an enquiry, from gathering information to drafting responses. You won’t be left to navigate HMRC’s strongly worded emails alone.
If you’re not a client, and want an experienced, award-winning accountancy team in your corner, get in touch, we’re always happy to help.
