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HMRC internal manual

VAT Assessments and Error Correction

Section 73(1) and 73(2) assessments: Use of annual accounts

Assessments are sometimes made following the discovery of discrepancies between the details declared on the trader’s VAT returns and the annual business accounts. Such a comparison can prove to be a useful credibility check and can be used for both outputs and inputs.

It is important to remember that the annual accounts are only as good as the information supplied to the accountant (e.g. bank lodgements, cash expenditure, gross takings figure) and involves the exercise of judgement (e.g. valuation of stock).

In other words, they are prepared from the books and records of the business as prepared and submitted by the trader.

This is why a disclaimer accompanies most accounts, prepared by the accountant. You should not be surprised if, as occasionally happens, an accountant repudiates the annual accounts prepared. The accountant may be exercising a judgement on new information that has come to his knowledge.

When annual accounts are likely to be a material factor in any assessment always request them and take them into consideration as appropriate. You should record the request and reply received if the accounts are not made available.

Do not delay the notification of an assessment to await production of annual accounts but do reconsider the assessment if they are produced later accompanied by a request for a reconsideration by HMRC.

Errors sometimes arise when an assessment is based directly upon a trader’s annual account figures, and the end of the financial year does not correspond with the end of one of the prescribed accounting periods.

It will normally be necessary to adjust the trader’s accounts figures to align them with prescribed periods. This will often be possible by the use of data contained in the trader’s basic records, but sometimes adjustment on a proportional basis will be necessary.

Where the recorded takings in the annual accounts in excess of those declared on the trader’s returns for the year, you should consider an assessment unless a satisfactory explanation for the difference is given. When issuing an assessment in this situation best judgement should be used in apportioning the tax.

As a rule, annual accounts are presented as tax exclusive and not as tax inclusive amounts. If you are not sure, ask before you compare the accounts figures to the trader’s declaration on the VAT returns before you calculate an assessment.