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HMRC internal manual

Enquiry Manual

HM Revenue & Customs
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Recalculating Profits: VAT: Liaison

Where you decide that an enquiry has VAT implications EM3755 or EM3756 you should, before settlement, obtain an assurance that the further liabilities will be reported to the VAT office.

If appropriate, a report should also be sent under EM0901.

VAT 3 year rule

The VAT Act 1994 sets time limits within which an assessment may be made. It cannot be made after the later of

  • two years after the end of the prescribed accounting period, or
  • one year after evidence of facts, sufficient to justify making the assessment, comes to the knowledge of (Revenue and) Customs

The Act also sets a time limit for assessment of no more than three years after the end of the accounting period unless VAT has been lost as a result of

  1. conduct for which the taxpayer has been convicted of fraud
  2. conduct involving dishonesty
  3. circumstances giving rise to a VAT failure to notify penalty.

In these cases the time limit is extended to 20 years.

This means that, providing the end of the relevant accounting period falls within the last two years, HMRC may make an assessment. To make an assessment going back three years (or more, e.g. in the case of fraud etc) HMRC must make the assessment within one year of obtaining evidence of facts.

Therefore, if the enquiry involves an ongoing business already registered for VAT no VAT adjustments or deductions should be routinely allowed for accounting periods ending more than three years ago.

However, if the taxpayer insists that additional VAT due for these earlier periods would be paid seek advice from contact link on subsequent procedures and assistance with the drafting of an appropriate letter of offer.