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HMRC internal manual

VAT Small and Medium Enterprises Assurance Manual

Inspection of premises, equipment and stocks and traders lifestyle: Introduction

The inspection of business premises, in order to form some idea of the nature and extentof activities being carried on, is of paramount importance. Where only services areprovided, we have no legal powers to inspect the premises.

Most traders’ will not object to officers’ inspecting their premises. Theinspection must be restricted to “business areas” and can only progress into“private areas”, if the officer is aware, or believes that, equipment and goodsrelating to the business are stored in those “private areas”. If invited by atrader to inspect records in “private areas”, the trader must produce therequested material. Officers’ must not search for records themselves. Traderreluctance to allow inspection of business premises should not deter officers’ fromexercising their powers under the VAT act. However, the exercise of the power to inspectmust be reasonable, necessary, and above all, proportionate to the intended aim.

Officers must be sure they understand the difference between “inspect” and“search”. Search involving some physical effort beyond merely opening doors toenter rooms, (e.g. stock rooms) and then looking and the circumstances in which we mightapply each. In the event of refusal to allow inspection of the premises, the officershould proceed in accordance with V1- 24B Officer’s Powers.

Observe and attempt to assess the scale of activity with particular regard to:

  • the type of plant and equipment;
  • the stocks of raw materials;
  • the goods in course of manufacture;
  • services being performed;
  • the stocks of finished goods;
  • deliveries taking place; and
  • use of subsidiary records for comparison with the level of business as shown in the accounts and with the total deductible input tax being claimed.

These observations may be particularly useful when assessing the credibility of theannual accounts e.g. does the observed stock level accord with that shown in currentassets?

Be alert for activities which are outside the trader’s main trade classification orwhich may not be covered in the records. Consider the possibility that unrecorded suppliesof taxable goods or services are being made. Indications may be the types of equipmentinstalled, vehicles operated, canteen arrangements, etc.

Note trading hours, the number of counters and people serving, the number, location andtype of tills, (including those apparently not in use) the method of payment, and thetrader’s method of cash control. Record these details on the EF Summary screen.Consider the trader’s lifestyle - is this in keeping with the level of declaredincome? Some of the more obvious areas may be noted in housing, clothing, jewellery,motorcars, holidays, schooling, expensive domestic appliances, mortgage or rentcommitments.