EM3757 - Recalculating Profits: VAT: Enquiry Settlements - Situation 3
No adjustment needed to proposed additions
You should resist any adjustment for VAT on the basis that the proposed additions are already VAT exclusive.
Business economics exercise
Where you quantify additions on the basis of a business economics exercise, for example, by reference to gross profit rate or some other business model, then the re-computation of takings will be VAT exclusive, assuming the trader is registered for and charging VAT on sales and the original accounts were prepared on a VAT exclusive basis.
Any claim for a further adjustment for VAT, whether by means of reducing the proposed additions or by allowing any VAT amounts ultimately paid as a direct tax deduction, should be resisted.
In this example, as in the earlier ones, the additions assume that takings (including VAT) have been suppressed and that incorrect returns have been made for both direct and indirect tax. Because of the method of quantification used, the proposed additions to profit are VAT exclusive but the business must also have received the additional VAT from its customers at the time the under-declared sales were made but not accounted for it to the VAT office. No further adjustments for VAT are necessary for Income Tax or Corporation Tax purposes and the business must meet any additional VAT liability itself.
The amounts to be debited to the director’s loan account when the account is rewritten EM8630+ will be the additions plus VAT thereon.