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HMRC internal manual

Enquiry Manual

HM Revenue & Customs
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Recalculating Profits: VAT: Enquiry Settlements - Situation 2

Additional VAT payable is an allowable deduction for Income Tax or Corporation Tax purposes.

Business becoming liable for VAT

Where a business’s turnover is below the VAT threshold, VAT is not charged to customers. The result of an enquiry is that the VAT threshold is triggered. The business will have to meet any VAT liability arising as a result of the increases in turnover from its own resources. That liability will be an allowable deduction for Income Tax or Corporation Tax purposes.

In such a case, a further complication may arise because, prior to registration, any business expenditure will have been deducted in the accounts on a VAT inclusive basis. In computing liability to VAT, VAT officers will offset the input VAT on expenses against outputs. You will therefore need to ensure that there is no double allowance of that input VAT.

VAT not charged on omissions

Similarly, additional VAT liability will be an admissible deduction where a business which is registered for VAT and whose accounts are prepared on a VAT exclusive basis agrees additions on the basis that understated receipts have resulted from sales or work done on which VAT was not in fact charged.

Accounts on VAT inclusive basis

Where the supporting accounts as originally submitted were prepared on a VAT inclusive basis and the suggested uplift in profits is attributable to increased sales or other discrepancies involving VAT, any further VAT payable will be an allowable deduction in computing profits in the same way that other payments of VAT in respect of sales accurately returned at the proper time were deducted in the profit and loss account.

The additional VAT liability in the three circumstances described above may be offset against additions to profits in the periods in which the relevant receipts arose BIM31615.

Liaison with the VAT office is covered at EM3765.