Recent research using HMRC data suggests VAT compliance activity is accelerating, with almost one in three large companies facing a VAT inspection in the last year. The same research indicates a 31% increase in inspections into large and medium-sized businesses, alongside a rise in late payment penalties.
What the research is telling us
The research highlights a sharp uplift in HMRC VAT inspections across the midmarket and large business population. Total inspections into large and medium-sized businesses rose to 11,894 in the year ended 31 March 2025, up from 9,071 the year before. This forms part of a longer trend, with inspections almost tripling since 2021/22 (3,589 cases).
The increase is concentrated in HMRC’s Medium Business Service population (rising from 8,451 to 11,256 cases in 12 months), while Large Business Service cases also increased to 638. For the largest businesses, the research also references an average yield of £8.6m per closed case, underlining why VAT remains a high-value focus area.
A key shift: more technical challenge, less “processing error”
A crucial takeaway is that the emphasis appears to be shifting toward technical interpretation. The research indicates that around 85% of suspected VAT underpayments in large businesses relate to legal interpretation or boundary‑pushing VAT positions, rather than simple clerical mistakes.
In practical terms, this type of scrutiny often centres on:
- VAT liability decisions (standard, reduced, zero-rated or exempt),
partial exemption methods and attribution of residual input tax,
place of supply and cross border service issues,
evidencing requirements that support a VAT treatment,
complex contracts and supply chain arrangements that affect the VAT analysis
- Where positions depend on judgement, the quality of the evidence trail can become as important as the technical conclusion.
Don’t overlook the penalty side of the risk
Alongside the increase in inspections, the research also highlights higher exposure to late payment penalties. HMRC issued nearly 582,000 fines for late VAT payments last year (up from 569,000), generating £302m in penalties (up from £294m).
The research also references how penalties can apply once VAT is overdue by 16 days and increase again after 31 days.
For businesses managing cashflow pressure, this reinforces the value of early planning and proactive engagement, rather than waiting until arrears escalate.
Practical steps to reduce risk (and disruption)
Based on what the research suggests HMRC is focusing on, there are a few sensible actions businesses can take now:
- Document the rationale for judgement areas and link it clearly to contracts and supporting evidence.
- Review higher-risk VAT areas where disputes and material adjustments are more common (for example partial exemption, complex supplies, property and cross‑border VAT).
- File VAT returns in good time and ensure VAT payments are made quickly to minimise any exposure to penalties and interest charges.
- VAT records are kept compliant and up to date in readiness for any HMRC compliance check
How the Xeinadin VAT team can help
We can support with VAT health checks focused on interpretation-led risk areas, audit readiness reviews (including documentation and governance), technical position papers for complex treatments, and practical support through HMRC enquiries and dispute management.
