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HMRC internal manual

VAT Assessments and Error Correction

Section 73(1) and 73(2) assessments: Arrears; tax inclusive or tax exclusive

When a credibility check has revealed a discrepancy, the calculation of tax will depend upon whether tax inclusive or tax exclusive values have been used to produce the total arrears.

Care must be taken to ensure that arrears calculated on

  • a tax inclusive basis are assessed at the VAT fraction, and
  • those on a tax exclusive basis at the rate of tax operative for the period(s) in question

Whichever method you use, it is important to compare ‘like with like’.

For example: If you use tax exclusive figures for purchases, then you must use tax exclusive figures to calculate the sales figures. For further guidance concerning the VAT fraction, see Notice 700: The VAT Guide.

This is a really important issue. An appeal against an estimated assessment was allowed in a case where the assessing officer agreed that he had wrongly used tax inclusive figures for purchases and tax exclusive figures for takings.

The tribunal held that the assessment had not been made to the best of judgement by HMRC. The case was P Friel [1977] VATTR 147, London 1977 (396).

However following the Court of Appeal ruling in Pegasus Birds Limited the more likely outcome of such an appeal would result in the quantum assessed being amended.