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HMRC internal manual

Enquiry Manual

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HM Revenue & Customs
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Recalculating Profits: VAT: Enquiry Settlements

VAT is not an element of taxable profit for Income Tax or Corporation Tax purposes. Therefore, before concluding an enquiry, you should always consider whether there are any VAT implications for the proposed additions to profits. These can arise both where additional sales have been discovered or because expenditure is disallowed. You should consider if

  • it is possible that VAT is included in the additions you propose?
  • the additions are likely to lead to further VAT liability and if so, should that liability be deducted from the proposed additions?

Effect of VAT

VAT can affect enquiry settlements in several ways. For example

  • additions to sales proposed by the Revenue have to exclude VAT EM3755 or
  • additions to sales proposed by the Revenue do not have to be adjusted to exclude VAT, even though they are in respect of sales attracting VAT EM3757 or
  • additional VAT liability arising as a result of an enquiry has to be allowed as a deduction for CT or IT purposes EM3756 

The correct approach will depend on the basis on which you compute the additions.

Distinction between sales and profits

There are cases where we agree additional profits (as opposed to pure sales) which are sales net of expenses although neither sales nor expenses are separately agreed. The view taken of the VAT treatment should be agreed EM3760 at the time the profits are agreed.

Similarly care needs to be taken to deal with VAT on expenses.

VAT officers may treat the understated profits reported to them as being inclusive of VAT when computing the additional VAT liability regardless of the basis on which those additions were originally calculated. In many cases, our view will be that the additions were in fact VAT exclusive. Thus, you should not necessarily regard the practice followed by the VAT office as conclusive in determining whether or not the additions to profits which you propose need to be adjusted for VAT or whether any additional VAT payable is an allowable deduction.

Where it appears that additional VAT liability computed by the VAT office reflects a different treatment of additions to that which you have adopted and this cannot be resolved with the accountant or taxpayer, you should make contact to see if a consistent basis can be agreed. Nothing should be done to commit the VAT office to any particular course of action without their agreement.

Section 127(2) FA72 provided the ‘gateway’ for exchange of information with Customs and Excise, prior to the Commissioners for Revenue and Customs Act 2005.

Now you can pass on to HMRC colleagues dealing with VAT any information you already hold which you consider to be relevant to their area. For Example:

  • Any relevant documents, reports and correspondence from trader/taxpayer files
  • Any relevant information from Departmental computer systems.

But you must not use the powers of one tax (e.g. SA, CTSA) to obtain information on behalf of another tax (e.g. VAT).

Where appropriate, notification of the results of a SA enquiry are normally sent to the appropriate VAT office through the VAT Liaison Officer who normally forms part of the RIAT.

Liaison with VAT offices is covered at EM3765.