Practical checklist to prepare your accounts for a VAT inspection

VAT inspections are stressful for many small business owners — I’ve been there with clients who suddenly get a letter from HMRC asking for records. The good news is that most inspections are straightforward if your bookkeeping is tidy and you know where your records live. Below I give a practical, hands-on checklist I use with my clients to prepare accounts for a VAT inspection. Follow it step by step and you’ll reduce anxiety, save time and avoid unnecessary penalties.

Before the inspection: immediate actions

If you receive an inspection notice, act quickly but calmly. Don’t ignore it.

• Read the notice carefully: check the period HMRC wants to inspect, the deadline for providing records and whether they want originals or copies.
• Contact your accountant: if you work with an adviser (or with me), loop them in immediately. I can liaise with HMRC and prioritise which records to pull.
• Create a document pack folder: make a physical or shared digital folder (I recommend a secure cloud location like OneDrive or Google Drive with restricted access) labelled with the VAT period and HMRC reference.
• Preserve original records: don’t alter or shred documents. HMRC can levy penalties for destroyed or falsified records.

Essential documents to gather

HMRC will usually expect to see a consistent set of records. I always start with these core items.

• VAT returns and calculations for the period in question and adjacent periods. Export the VAT return from your accounting software (Xero, QuickBooks Online, Sage) and include working papers showing how figures were calculated.
• Sales invoices and credit notes: ensure you include all VAT invoices issued during the period and any subsequent credit notes that relate to those invoices.
• Purchase invoices and VAT receipts: all supplier invoices that support input VAT claims. Group them by VAT rate if you use mixed VAT rates.
• Point of Sale (POS) reports and till rolls: for retail or hospitality businesses, provide daily takings summaries, EPoS reports (e.g., Square, Zettle, Lightspeed) and bank deposit breakdowns.
• Bank statements: include all business account statements for the period and the month before/after — HMRC often uses bank flows to reconcile income.
• Import/export documentation: C88s, bills of entry, commercial invoices, and evidence of VAT accounting schemes if you use postponed VAT accounting.
• Payroll records: if staff costs or VAT for benefits in kind are relevant, include PAYE records and payslips.
• Contracts and agreements: where VAT treatment depends on contract terms (e.g., place of supply for digital services, long-term service contracts), include the contract and any variation documents.
• Bad debt evidence: if you have claimed bad debt relief, provide reminders, correspondence and proof of write-off.

Organising the documents

HMRC doesn’t expect you to send disorganised files. Present records clearly — it speeds up the inspection and reduces follow-up queries.

• Chronological order: sort invoices and bank transactions by date.
• Indexed sections: create sub-folders for Sales, Purchases, Bank, Payroll, Imports/Exports and Contracts. I use simple file names like “Sales_2023-04_INV123.pdf”.
• Summary spreadsheets: include a one-page summary that maps your VAT return boxes to the supporting documents (e.g., Box 1 sales = Sales folder, invoices 001–150).
• Highlight key transactions: flag unusual items (large one-off sales, goods returned, cross-border supplies) and add a short note explaining them.

Common VAT pitfalls I look for

When preparing clients, I pay extra attention to these frequent trouble spots — addressing them before HMRC does can prevent queries.

• Missing VAT invoices: ensure you have full VAT invoices for business-to-business sales over the VAT threshold (name, address, VAT number, invoice number, VAT amount).
• Incorrect VAT rates: check that goods and services use the right rate (standard, reduced, zero, exempt). I recommend keeping a simple VAT rate cheat-sheet tailored to your products.
• Private vs business use: correctly apportion VAT on assets or services partly used privately (e.g., company car, mobile phone).
• Reverse charge errors: verify OTS-supplies and B2B reverse charges are handled correctly and self-accounted when necessary.
• Missing import evidence: for EU/import VAT, make sure you have customs paperwork and proof of VAT accounted (or postponed accounting entries).

Software and processes that speed things up

I recommend systems that reduce manual work and make evidence retrieval simple.

• Cloud accounting: Xero and QuickBooks Online make it trivial to extract VAT reports and invoice PDFs. Enable automatic bank feeds to match transactions easily.
• Receipt capture: Dext (formerly Receipt Bank), Hubdoc or AutoEntry save time on purchase invoice collection and create searchable digital records.
• EPoS integrations: ensure your till system feeds into your accounting package or exports clear sales summaries. Reconcile takings to deposits every day if possible.
• Document retention policy: keep digital backups in at least two places and label files with dates and invoice numbers so they’re quick to find.

Preparing your explanations

HMRC inspectors often ask for clarification rather than more documents. Draft short, clear explanations for any anomalies.

• One-page narrative: include a short explanation for adjustments, unusual entries or large one-off transactions.
• Chronology of events: if VAT treatment changed (e.g., new contract terms), provide a timeline with dates and decisions.
• Contact details: include a named contact (your accountant or yourself) with a direct phone and email in the folder.

What HMRC typically requests in terms of retention

During the inspection: practical tips

• Be cooperative and factual: answer questions concisely and point them to the folder location of supporting evidence.
• Keep records of correspondence: save all emails and notes of phone calls — I log the inspector’s name, date and what was asked.
• Don’t rush changes: if HMRC suggests an amendment, consult your accountant before agreeing to adjustments that could carry penalties.

If you’d like a printable checklist version of this pack or a template spreadsheet that maps your VAT return to supporting documents, I have downloadable templates I use with clients — happy to share one tailored to your business type (retail, services, or e-commerce). Drop me a note and I’ll send the right version.