Is There VAT on Postage?

This is a question I hear regularly from business owners and it is usually asked with a mix of concern and uncertainty. VAT can feel like one of the most exposed areas of tax because it involves regular reporting, cash flow, and detailed rules that change depending on what you sell and how you operate. Many people worry that a simple mistake could trigger an investigation or that HMRC might turn up without warning.

The short answer is yes HMRC can audit your VAT returns. However an audit is not something to panic about and it does not automatically mean HMRC thinks you have done something wrong. In many cases VAT audits are routine, targeted, or prompted by risk indicators rather than suspicion of fraud.

In this article I will explain what a VAT audit really is, why HMRC carries them out, how they choose which businesses to review, what happens during a VAT audit, and how you can prepare and protect yourself. I will also share practical advice based on real client experiences so you know what to expect and how to handle the process calmly and professionally.

What Does a VAT Audit Mean?

A VAT audit is HMRC’s way of checking that your VAT returns are accurate and that you are applying VAT rules correctly. HMRC refers to these reviews using various terms such as VAT inspection, VAT compliance check, or VAT visit but they all serve the same purpose.

During a VAT audit HM Revenue & Customs may review:

Your VAT returns

Sales and purchase records

VAT invoices

Accounting systems

How VAT is applied to your income and expenses

The aim is to confirm that the VAT you have declared matches your underlying records and that VAT has been treated correctly.

An audit is not a criminal investigation. It is an administrative check designed to protect the VAT system.

How Often Can HMRC Audit VAT Returns?

There is no fixed schedule for VAT audits. HMRC does not audit every business and there is no rule such as once every five years.

HMRC can audit your VAT returns:

At any time

More than once

Even if you have been audited before

Some businesses are never audited. Others may be reviewed several times over their trading life particularly if they operate in higher risk sectors.

The key point is that submitting a VAT return does not guarantee it will never be reviewed later.

Why Does HMRC Audit VAT Returns?

HMRC audits VAT returns for a variety of reasons. Sometimes the reason is clear. Other times it is simply part of a broader compliance programme.

Common reasons include:

Random selection

Risk profiling based on sector

Unusual VAT repayment claims

Inconsistent figures between returns

Errors identified from previous checks

Information received from third parties

VAT is particularly sensitive because it involves reclaiming tax. Large or frequent VAT repayments almost always attract attention.

High Risk VAT Areas HMRC Focuses On

Over the years HMRC has identified certain VAT risk areas that receive more scrutiny.

These include:

Construction and the domestic reverse charge

Hospitality and food businesses

Ecommerce and online sellers

Cash heavy businesses

Businesses reclaiming large amounts of input VAT

Partial exemption and mixed use businesses

If your business falls into one of these categories it does not mean an audit is inevitable but it does mean accuracy matters even more.

Does Being VAT Registered Increase Audit Risk?

Being VAT registered does not automatically increase your risk of an audit but it does mean you are within HMRC’s VAT compliance framework.

Factors that can increase audit likelihood include:

Voluntary VAT registration with low turnover

Regular VAT repayment returns

Significant changes in VAT patterns

Late or incorrect VAT submissions

VAT registered businesses are expected to maintain good records and HMRC will assume a certain level of compliance knowledge.

Can HMRC Audit Old VAT Returns?

Yes HMRC can audit past VAT returns.

In most cases HMRC can go back:

Four years for underdeclared VAT

Up to six years in cases involving carelessness

Up to twenty years in cases involving deliberate behaviour

This is why correcting VAT errors early is so important. Mistakes left unresolved can come back years later with interest and penalties.

How Will HMRC Notify Me of a VAT Audit?

HMRC usually contacts you in writing before carrying out a VAT audit.

You will normally receive:

A letter explaining that a VAT compliance check is taking place

Details of the VAT periods under review

A request for records or information

A proposed date if a visit is required

Unannounced visits are rare for VAT unless HMRC suspects serious non compliance.

Most VAT audits today are conducted remotely with documents requested electronically.

What Happens During a VAT Audit?

A VAT audit usually follows a structured process.

Initial Contact

HMRC will outline:

The scope of the audit

The VAT periods involved

The information they require

This is your opportunity to engage professionally and clarify expectations.

Records Review

HMRC may ask for:

VAT returns

Sales and purchase ledgers

VAT invoices

Bank statements

Contracts and agreements

Details of VAT treatment decisions

They may focus on specific areas rather than reviewing everything.

Questions and Clarifications

HMRC may ask questions such as:

Why VAT was applied at a particular rate

Why VAT was reclaimed on certain expenses

How figures reconcile to accounts

How systems are set up

These questions are normal and should be answered clearly and honestly.

Findings and Outcome

At the end of the audit HMRC will:

Confirm everything is correct

Identify errors and assess VAT due

Recommend changes to processes

In some cases apply penalties

Not all audits result in additional VAT being due.

What Are HMRC Looking For in a VAT Audit?

HMRC focuses on accuracy and consistency rather than perfection.

They will typically look for:

Correct VAT rates

Valid VAT invoices

Proper treatment of zero rated and exempt supplies

Accurate VAT return calculations

Consistent application of VAT rules

They are less concerned with small rounding differences and more concerned with systematic errors.

Common VAT Errors Identified in Audits

Some errors appear again and again in VAT audits.

The most common include:

Charging VAT at the wrong rate

Reclaiming VAT without a valid invoice

Reclaiming VAT on client entertaining

Incorrect treatment of postage

Errors with zero rated supplies

Incorrect partial exemption calculations

Most of these errors arise from misunderstanding rather than intent.

Can HMRC Impose Penalties After a VAT Audit?

Yes HMRC can impose penalties but they are not automatic.

Penalties depend on:

The behaviour that led to the error

Whether the error was careless or deliberate

Whether you disclosed the error voluntarily

Penalties are often reduced or eliminated where:

Errors were unintentional

You cooperated fully

You corrected mistakes promptly

Interest on late paid VAT is usually charged even where penalties are reduced.

Can I Challenge HMRC’s Findings?

Yes you have the right to challenge HMRC decisions.

If you disagree with the outcome you can:

Ask for clarification

Request a review

Appeal to a tax tribunal

Professional advice is strongly recommended before challenging HMRC as VAT law is technical and outcomes depend on evidence.

How to Prepare for a VAT Audit

Preparation makes a huge difference.

I usually advise clients to:

Keep VAT records organised and accessible

Reconcile VAT returns to accounting records

Review VAT treatment regularly

Correct known errors early

Keep written notes on VAT decisions

A well prepared business often finds VAT audits straightforward.

Should I Use an Accountant During a VAT Audit?

In my professional opinion yes.

An accountant can:

Communicate with HMRC on your behalf

Ensure information is presented correctly

Challenge incorrect assumptions

Reduce stress and disruption

HMRC audits are far easier when handled professionally.

What If HMRC Finds Errors?

If HMRC identifies errors the outcome depends on severity.

Possible outcomes include:

Additional VAT payable

Adjustments to future returns

Penalties and interest

Advice on improving systems

Most VAT audits do not escalate beyond this stage.

Does a VAT Audit Mean I Have Done Something Wrong?

No.

Many VAT audits are routine or risk based rather than accusatory.

I regularly see audits where:

No errors are found

Minor adjustments are made

HMRC simply closes the case

Being audited is part of being VAT registered not a sign of failure.

Practical Advice I Give to Clients

When clients ask whether HMRC can audit their VAT returns I usually say yes and then explain how to stay comfortable with that fact.

My key advice is:

Treat VAT as an ongoing process not a quarterly task

Keep records clear and consistent

Ask questions when unsure

Correct mistakes early

Do not ignore HMRC letters

A calm and proactive approach makes all the difference.

So Can HMRC Audit Your VAT Returns?

Yes HMRC can audit your VAT returns and they are legally entitled to do so. However a VAT audit is not something to fear. It is a review process designed to ensure the VAT system works as intended.

Most audits are manageable and many end with no action required. Problems usually arise when records are poor, VAT rules are misunderstood, or HMRC correspondence is ignored.

If you understand your VAT position, keep good records, and seek advice when needed a VAT audit becomes a process rather than a problem.