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HMRC internal manual

Enquiry Manual

HM Revenue & Customs
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Recalculating Profits: VAT: Enquiry Settlements - Situation 1

Proposed additions to profits should exclude vat

The business is registered for and charging VAT on its sales and the accounts originally submitted to the Revenue were prepared on a VAT exclusive basis.

Undisclosed business takings used for private purposes

It is established in the course of the enquiry that undisclosed business takings have been used for non-business purposes. You propose additions, either on the basis of shortfalls computed by means of a capital statement or the totals of sums deposited in previously undisclosed private bank accounts. The sums arrived at are likely to be inclusive of VAT since the trader will simply have used gross takings for non-business purposes or deposited them in the undisclosed bank account. The proposed additions should exclude the VAT element.

This approach will also apply in a company enquiry where extractions are made by shareholder directors and you compute additions on the basis either of capital statements drawn up for each director or sums paid into those directors’ private bank accounts.


Capital statements show additions of £10,000 representing the undisclosed VAT inclusive sales for periods when the rate of VAT is 17.5 per cent. The treatment of the VAT will form part of the discussions leading to the settlement of tax and NIC liabilities on these additions. If an assurance is given that the further VAT due will be reported to the VAT office the shortfalls should be reduced by 17.5/117.5 x £10,000 = £1,489 to arrive at the taxable understatement of profits £8511.

In a company case the whole amount diverted of £10,000 should be debited to the director’s loan account when this is to be recovered EM8630+.

Liaison with the VAT office is covered at EM3765