Why HMRC inspects margin scheme businesses
The VAT Margin Scheme is an area HMRC monitors closely because it is one where abuse is possible — deliberately understating purchase prices or selling prices to reduce the declared margin. This does not mean all margin scheme inspections are triggered by suspicion of wrongdoing. Many are routine, sector-specific, or triggered simply because a return looks different from what HMRC expects for a business of your size and type.
What HMRC cares about above all is whether your stock book is complete, contemporaneous, and consistent with your VAT returns. If your records are well-kept, an inspection is usually brief and uneventful. If they are incomplete or inconsistent, the consequences can be significant. For guidance on how VAT inspections work, see HMRC's guidance on tax compliance checks.
How HMRC makes contact
HMRC will typically notify you in writing before an inspection. For routine compliance checks, you will usually receive a letter explaining that HMRC wants to review your VAT records, with a proposed date and time, or a request to contact them to arrange a visit. Unannounced visits do happen but are less common for routine checks.
When you receive an inspection notice, it is worth contacting your accountant immediately. They can help you prepare, accompany you during the inspection if needed, and correspond with HMRC on your behalf.
What HMRC looks at for margin scheme sellers
Inspectors reviewing a margin scheme business will typically focus on the following:
- The stock book — is it complete? Does every sold item have a corresponding purchase record? Are the required fields (description, dates, prices, names and addresses) all present?
- Purchase evidence — can you demonstrate that purchased items were eligible for the margin scheme? This means confirming they came from private individuals or non-VAT-registered sellers, with no VAT invoice received.
- Sales invoices — do your sales invoices correctly state that the item is sold under the VAT Margin Scheme, without showing VAT as a separate amount?
- VAT return reconciliation — do the totals in your stock book match the figures on your submitted VAT returns? Any discrepancy will need to be explained.
- MTD compliance — are you keeping digital records and submitting through MTD-compatible software as required?
Common issues that inspectors find
The most common problems uncovered during margin scheme inspections are gaps in the stock book (missing purchases, missing buyer details, or items with no linked sale record), sales invoices that incorrectly show VAT as a separate line, and inconsistencies between the stock book total and the VAT return. None of these require deliberate wrongdoing to occur — they typically result from manual record-keeping that falls behind, or from using accounting software that was not designed for the margin scheme.
Six years of records, readily accessible
HMRC can ask to see records going back up to six years. Records must be available and presentable — inspectors expect to be able to follow the trail for any individual transaction. If your stock book is a patchwork of spreadsheets from different periods, some with gaps, this causes problems even if the underlying transactions were correct.
How to prepare before an inspection arrives
The best preparation for a VAT inspection is ongoing, not a last-minute scramble. If your stock book is current and complete at all times — every purchase recorded when it happens, every sale matched to its purchase — then preparing for an inspection means little more than pulling together your records in a clear format. Key steps when you receive an inspection notice:
- Contact your accountant and let them know
- Review your stock book for any gaps or unmatched records and address them
- Confirm your sales invoices comply with margin scheme requirements
- Reconcile your stock book totals against your submitted VAT returns for the period under review
- Have your purchase evidence available — receipts, invoices, or stock purchase records
How AutoVAT keeps you inspection-ready
AutoVAT maintains a complete, real-time stock book — every purchase and sale recorded with the full details HMRC requires. If an inspection arrives tomorrow, your records are ready. Our system also flags inconsistencies as they occur, so problems are caught and corrected at the time of the transaction rather than discovered months later during an HMRC review. Get in touch to find out how AutoVAT keeps your records inspection-ready as a matter of course.
