HMRC VAT Inspection: What Restaurant Owners Need to Know

Running a restaurant, café or takeaway comes with enough pressure – the last thing you need is a letter from HMRC saying they’re carrying out a VAT inspection. But if that does happen, being prepared can make all the difference.


In this article, we’ll explain what a VAT inspection involves, why hospitality businesses are often targeted, how long the process can take, and what practical steps you can take to avoid penalties and keep your business running smoothly.


What is a VAT inspection?


A VAT inspection (also called a compliance check) is when HMRC reviews your VAT returns and supporting records to check everything has been reported correctly. It might be a routine check or triggered by something unusual in your filings.


For restaurant and takeaway businesses, HMRC tends to focus on areas where mistakes are common – things like cash handling, split rates for eat-in vs takeaway, and how tips and service charges are treated for VAT.


Inspections may take the form of:

  • Desk-based checks – You send over records electronically or by post.

  • In-person visits – An HMRC officer visits your premises, sometimes unannounced.

  • Remote reviews – Carried out over phone or video, often with digital records provided in advance.


Why hospitality businesses are more likely to be inspected


HMRC views the hospitality sector as high-risk, due to the mix of cash and card payments, varying VAT rates, and the fast-paced nature of the industry.


You’re more likely to be selected for an inspection if:

  • You’ve submitted late or unusual VAT returns

  • Your sales figures fluctuate significantly between periods

  • You regularly reclaim VAT but have relatively low reported income

  • You haven’t registered for VAT when you should have (i.e. turnover over £90,000)

  • You operate with a high proportion of cash sales


How long does a VAT inspection take?


This depends on the size and complexity of your business. A small takeaway might only take a few hours to inspect, while a busy restaurant with multiple tills, delivery services, and card readers may take longer.


Some checks can be concluded in a couple of weeks, but if HMRC uncovers discrepancies or requests more records, it may take several months.


What will HMRC look at?


For hospitality businesses, HMRC usually focuses on:

  • Sales records – Till receipts, EPOS reports, delivery app income (Just Eat, Uber Eats, etc.)

  • VAT treatment of food and drink – Eat-in (standard rated) vs takeaway (zero-rated or standard depending on temperature), and alcohol sales

  • Cash handling procedures – Including Z-read reconciliations and bank deposits

  • Service charges and tips – Whether VAT has been applied correctly

  • Purchase invoices – Especially on goods where VAT should not have been reclaimed (e.g. staff meals, non-business use)


They may also review:

  • VAT returns and calculations

  • Stock records and wastage reports

  • Supplier contracts

  • Payroll records if tronc systems or tips are involved


What happens after the inspection?


There are three possible outcomes:

  1. No action – HMRC is happy with your VAT records.

  2. VAT assessment – If errors are found, HMRC will issue a bill for the underpaid VAT.

  3. Penalties and interest – If the mistake is classed as careless or deliberate, they may apply a penalty of up to 100% of the VAT due, plus interest (currently 7.75% as of July 2025).


Example: A takeaway business incorrectly zero-rates all food, including hot eat-in meals. HMRC identifies £10,000 of VAT underpaid over 12 months and applies a 15% penalty (£1,500) – although this could be reduced with full cooperation.


How to prepare if you’ve been contacted


If HMRC contacts you about a VAT inspection, here’s what to do:

  1. Gather your records – Till reports, invoices, Z-reads, bank statements, and VAT return workings.

  2. Double-check your VAT treatment – Are you correctly charging VAT on eat-in meals, drinks, and service charges?

  3. Talk to your accountant – Contact us immediately. We’ll help you prepare for the inspection, answer HMRC’s questions, and correct any issues before they escalate.

  4. Be upfront – If there’s an error, it’s often better to disclose it voluntarily. HMRC is more lenient when businesses are proactive and cooperative.


How to avoid future VAT issues


To reduce the risk of future inspections:


  • Use a reliable EPOS system and reconcile Z-reads daily

  • Keep detailed records for eat-in, takeaway, and delivery sales

  • Review how tips and service charges are handled for VAT and payroll

  • Avoid reclaiming VAT on non-business purchases

  • Book a regular VAT review with your accountant


Need help?


If your restaurant, café or takeaway has been contacted by HMRC – or if you just want to make sure your VAT is being handled properly – we’re here to help. We’re one of the UK’s leading accountants for hospitality businesses. We understand the common VAT pitfalls in your industry, and we know exactly what HMRC will be looking for.


For help, book a call at www.msfassociates.co.uk/book-a-call or phone us on 0113 240 4100.