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HMRC internal manual

VAT Small and Medium Enterprises Assurance Manual

Challenge of selected purchases and importations: suppression of inputs / outputs

  • input tax considerations can reduce the incentive to suppress purchases. However, in order to evade tax on outputs, a trader may also suppress inputs in the same proportion, so that the margin of gross profit appears consistent. This allows suppression in that proportion and ensures there is no failure in the cash reconciliation. When traders apply a “half-on, half-off” system this suppression is difficult to detect using the standard control techniques. The possibility of evading Income Tax or Corporation Tax may also encourage such traders to forgo the input tax involved;
  • there may also be collusive suppression right through the chain of supply, from the importation or manufacture of materials to the distribution of the final product, which may then be sold by retail outlets, without tax being accounted for. Because of the source of the supply and the lack of purchase documentation, the trader may see no benefit in declaring such purchases. This may also apply where the goods have been dishonestly acquired, and documenting acquisition may raise uncomfortable questions respecting their provenance;
  • while traders may suppress goods for resale, they may forget about expenses that vary according to activity such as laundry at a hotel. Consider a trend analysis comparing turnover growth with direct expenses;
  • where suppression is suspected, compare purchase orders, delivery notes, brands in stock to purchase invoices, cash and carry/supermarket price labels on stock to purchase invoices and, if kept, the goods received books, with available purchase invoices;
  • compare total purchases over a period with payments to suppliers as shown in ledgers, cashbooks, cheque counterfoils or elsewhere;
  • payments may be disguised as loans to parties who have interests in both the production and marketing firms;
  • “urgent” references should be raised to selected suppliers to obtain details of goods supplied over a period; and
  • suppression of purchases invariably implies suppression of output if you suspect suppression/evasion then please refer to the RIS Evasion Referral intranet page for further guidance.