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HMRC internal manual

VAT Assessments and Error Correction

Section 73(1) and 73(2) assessments: Allowance for input tax

A trader is legally obliged to account for output tax whereas he is only entitled to deduct the input tax. This means that there is no legal requirement on him to claim input tax.

You should, however, consider the reasons for any omission before deciding whether or not to take any corrective action. For example, an output tax assessment may be instigated by the discovery of unrecorded purchases in which case you would need to consider the implications of this being a deliberate action by the trader and the possibility of deliberate inaccuracy or even fraud.

If an assessment of under-declared output tax is instigated by the discovery of unrecorded purchases you must give consideration to making an allowance for input tax on the purchases concerned. The rules governing both the evidence of entitlement to input tax deduction and the exercise of the right to that deduction are contained in the Input Tax Manual.

You must remember that even if no tax invoices are provided, the trader may still have entitlement to input tax deduction. It is for the trader to satisfy you as to that entitlement.

You should invite production of alternative evidence. If it is satisfactory you should allow an appropriate amount of input tax. You should also include a note of this action and the trader’s response in the visit report as it may prove to be of vital importance in the event of a formal appeal.