Declaring and paying VAT is one of the many routine legal responsibilities resting on the shoulders of businesses. In an ideal world, this takes place without incident and has minimal impact on the day-to-day operations of the company.

However, in some instances, HMRC may decide to carry out a formal evaluation and/or investigation, if the department believes there is a discrepancy between the VAT a business has declared and what HMRC believes is due. It is crucial for all businesses to understand exactly what this process entails, including time limits on VAT assessments, and what you should do as an organisation to ensure a positive outcome.

Background on VAT assessments

If HMRC believes a company has underpaid on VAT, it will issue a VAT assessment to determine the amount due. This follows procedures set out in the Value Added Tax Act 1994 (Section 73, Failure to make returns etc). If the amount deduced from the assessment is disputed by the company being examined, an appeal must be lodged within 30 days, otherwise HMRC will proceed with measures to recover the debt. This is a key part of the process that businesses must be aware of: if you disagree with the outcome of the assessment, act quickly to challenge it.

HMRC is obliged to raise an assessment within the prescribed statutory period, to ensure that it does not issue a demand for under-declared or over-claimed tax once this period has elapsed. This requirement was emphasised in the recent case of Monmore Properties Ltd [2024] TC 09072. In this case, the First-tier Tax Tribunal upheld an appeal against five VAT assessments which were time-barred when raised by HMRC. The judge stated:

“Tax is undoubtedly due and would have been payable had an assessment been raised timeously. The simple fact is that it was not.”

This judgment is of significant relevance to anyone who has received a VAT assessment from HRMC but believes it was raised out of time. When receiving such an assessment, it is essential to ensure that it relates to the relevant VAT period, and is for the correct amount.

Time limits for VAT assessments: digging deeper

Section 77 of the Value Added Tax Act 1994 states that an assessment of an amount of VAT due must be made within the limits provided, and must not be made after the later of:

However, it must also be noted that if further evidence comes to the knowledge of the Commissioners after an assessment is made, a further assessment can be ordered. Knowing the ins and outs of the process, and being prepared for every possible step, is vital for businesses.

Notification of VAT assessments

While the Value Added Tax Act 1994 prescribes time limits for the making of a VAT assessment, it does not prescribe time limits for the notification of such an assessment. The basic rule is that HMRC has a maximum of four years from the end of the VAT period in question to issue a valid assessment, with this period extended to 20 years in the case of fraud.

Once HMRC has completed its inspection and has the information to calculate an assessment, it must prepare and issue it within 12 months. Any Penalty Notice must also be served within two years of deciding how much tax is owed. These rules have been firmed up and reinforced within HMRC following the Monmore Properties Ltd case mentioned above.

There is no specific manner in which a VAT assessment has to be made and notified. However, case law has determined that a letter which clearly contains the decision to assess, and provides details of the amounts outstanding for each VAT period, will suffice.

How to deal with a VAT assessment

If your business receives a VAT assessment from HMRC, it is imperative that all details are carefully checked to ensure that, amongst other things, the relevant VAT period calculations are correct and the assessment follows the rules around time limits.

In any event, seeking independent legal advice upon receipt of an assessment is a good approach, as this enables you to deal with any potential disputes in the most effective way possible. Be aware, be prepared, and you have the best possible chance of a satisfactory outcome in any investigation.