Is Your Business Audit-Proof? 10 VAT Questions You Must Ask

Let’s be honest-nothing spikes a business owner’s blood pressure quite like a brown envelope from HMRC.

Value Added Tax (VAT) is often the most complex tax for UK businesses to navigate. With the VAT registration threshold now sitting at £90,000, many small businesses are finding themselves pulled into the system sooner than expected. And HMRC isn't missing much these days; the latest data shows the UK VAT gap is sitting at £8.9 billion (about 5.0% of theoretical liability). That means the taxman is more motivated than ever to close that gap through compliance checks and audits. Find out more about the statistics on HMRC`s website here.

As an accountant who has sat across the table from HMRC inspectors and held the hands of worried directors, I can tell you that most VAT errors aren't malicious-they're just misunderstandings. But "I didn't know" doesn't usually get you out of a penalty.

To keep your business safe, solvent, and stress-free, here are the top 10 questions you need to be asking right now.

1. Do I actually need to register for VAT yet?

This is the starting line for most. You must register if your taxable turnover exceeds £90,000 in any rolling 12-month period—not just your financial year. I’ve seen clients get caught out because they had a bumper month in July and forgot to check the previous 11 months.

Pro-Tip:

Don't wait until you hit £89,999 to think about it. If you sell primarily to other VAT-registered businesses, consider voluntary registration even before you hit the threshold. It allows you to reclaim VAT on your expenses (like laptops and accountancy fees), which puts cash back in your pocket. If you sell to the public, however, registering early might just make you 20% more expensive than your competitors, so tread carefully. Therefore, it helps to read Is Being VAT Registered Killing Your Business.

2. How far back can HMRC investigate my VAT records?

This is the question that keeps people awake at night. The short answer, according to HMRC, is usually four years.

If you have made an innocent mistake, perhaps a calculation error or a missed invoice-HMRC can typically issue an assessment going back four years from the current accounting period.

However, here is the scary part:

If HMRC believes an error was deliberate (fraud), they can go back 20 years. In my experience, if you are honest and maintain decent records, you are generally looking at the four-year window. The key is to never ignore a mistake once you find it. But don't leave it to chance and see how can you keep your documents organised here.

3. Can I claim back VAT on things I bought before I registered?

Yes, and you absolutely should! This is one of the most overlooked "wins" for new businesses. HMRC allows you to reclaim VAT on:

• Goods you still have on hand (like stock, machinery, or office equipment) bought up to 4 years before registration.
• Services (like legal fees, branding, or accountancy) bought up to 6 months before registration.

The catch:

You must have the original VAT invoices and, crucially for goods, you must still own them at the date of registration. If you bought a laptop three years ago and sold it last week, you can't claim the VAT back on it.

Take a look at these 8 expenses that you probably didn`t know you can reclaim here.

4. Am I on the right VAT accounting scheme?

Most businesses default to Standard Accounting, where you pay VAT based on the invoice date. But what if your customer takes 60 days to pay you? You end up paying HMRC VAT that you haven't collected yet. That’s a cash flow nightmare.

Maintaining healthy cash flow is vital for business success in 2026. If you're feeling the pinch, learn how to keep your finances on track here.

My recommendation:
Ask if you are eligible for. This scheme allows you to pay VAT to HMRC only when your customer actually pays you. It’s a lifesaver for small businesses with slow-paying clients. Alternatively, the Flat Rate Scheme might simplify your paperwork, though it’s less financially generous than it used to be for many sectors.

5. What triggers a VAT investigation?

HMRC’s computer system, "Connect," is incredibly sophisticated. It cross-references bank data, tax returns, and even online sales platforms. Common triggers I see include:

• Consistently late returns: This screams "disorganised records."
• Large VAT repayment claims: If you usually pay HMRC £1,000 and suddenly ask for a £10,000 refund, expect a query.
• Figures that don't match industry averages: If every other cafe in your postcode claims 40% input VAT and you claim 80%, you’ll be flagged.

The fix:
If you have a legitimate reason for an anomaly (like a large equipment purchase triggering a refund), add a note to your return or keep the invoice handy. Transparency kills suspicion.

Watch the video to see 5 HMRC Red Flags and how to avoid them.

6. Can I reclaim VAT on client entertainment?

I hate to be the bearer of bad news, but usually, no. Taking a potential client out for a fancy lunch might be good for business, but HMRC strictly blocks VAT recovery on business entertainment for non-employees.

With Rachel Reeves` most recent budget, these may be subjected to Stealth Taxes.

However, VAT on (like a Christmas party) is recoverable, provided it’s reasonable and open to all staff. Just make sure you aren't trying to pass off a dinner with your business partner as a "staff party" if you're the only two directors!

7. What happens if I find a mistake on a past return?

Don't panic. You don't always need to file a terrifying formal disclosure.

If the net error is less than £10,000 (or up to £50,000 if that amount is less than 1% of your turnover), you can usually correct it on your next VAT return using what’s known as "Method 1." You simply adjust your box 1 or box 4 figures.

If the error is larger, you must notify HMRC separately using form.

Top tip: If you find the error before HMRC does, and you report it voluntarily, penalties are significantly lower (often zero) compared to if they find it during an audit.

8. My customer hasn't paid me. Can I get the VAT back?

If you are on Standard Accounting, you’ve likely already paid the VAT to HMRC for that unpaid invoice. It stings to pay tax on money you never received.

The good news is Bad Debt Relief. If an invoice remains unpaid for six months after the due date (and you have written it off in your accounts), you can reclaim that VAT on your next return. I see business owners forget this all the time-don't let HMRC keep money that belongs to you.

9. Do I need to charge VAT to overseas customers?

Since Brexit, this has become a minefield. Generally:

• Goods exported outside the UK: Usually zero-rated (0% VAT), but you must keep rigorous proof of export.
• Services to overseas businesses: Often "Outside the Scope" of UK VAT (no VAT charged).
• Services to overseas consumers: This is where it gets tricky and depends heavily on what you are selling (digital services vs. consultancy).

My recommendation:
Never guess on this. "I thought it was zero-rated" is not a valid defence. If you trade internationally, get specific advice for your service type.

10. What are the penalties if I file late?

Gone are the days of the default surcharge. As of January 2023, HMRC introduced a points-based penalty system.

The takeaway: Even if you can't pay, always file on time. It stops the points from racking up. You can usually set up a "Time to Pay" arrangement for the cash, but you can't negotiate a missing return.

Stay Proactive, Not Reactive

The golden rule of VAT is that it is a transaction tax-it happens in real-time. Unlike Corporation Tax, which you look at months after your year-end, VAT errors compound quickly.

If you are unsure about an invoice, a scheme, or a reclamation, ask before you file the return. A five-minute call with your accountant now is cheaper than a five-month enquiry from HMRC later.