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HMRC internal manual

VAT Small and Medium Enterprises Assurance Manual

Checks on zero rating and outside the scope for outputs: introduction

  • a trader not visited frequently may incur a significant, irrecoverable revenue debt as a result of charging tax at the wrong rate, particularly to unregistered persons who would bear the final “sticking” VAT. Officers should therefore resolve any liability doubts during their inquiry, confirming their ruling(s) in writing and in any case recording them on EF or other recognised reporting format. Even where none of the significant risks described below appears to be present at the time, this is an important aspect of trader education and may prevent these issues arising at a later stage;
  • given the above, liability matters may take up a good deal of the officer’s time, but this cannot be avoided when the trader has genuine problems. However, officers should be wary of traders who deliberately exploit liability matters to divert attention from other aspects;
  • deliberate misdescription may occur in any trade, particularly those that make supplies direct to consumers. For example, repairs may be misdescribed as new construction; adult garments may be misdescribed as children’s wear for example;
  • even between registered traders, errors in liability at the manufacturing and/or wholesale stages may be carried down to the final distribution stage, since purchasers tend to rely on their suppliers’ invoices to bear the correct information;
  • there may, however, also be collusion between both parties to misdescription;
  • when goods for both business and personal use are supplied, they may be misdescribed on the invoice in such a way as to imply that they are all for business use, for example business entertainment described as advertising;
  • some traders may be tempted to resort to misdescription to obtain, or to exaggerate, repayments especially when there is financial difficulty;
  • if there is a significant trade in zero-rated or exempt supplies, the officer should examine goods, orders, correspondence, specifications for example, for signs of misdescription in the course of the invoice scrutiny; and
  • where there is any doubt as to the validity of documents produced, a reference should be sent to the appropriate Risk Team as necessary, using either VAT 452/453.