VAEC1111 | Powers of assessment: VAT assessment powers: The law relating to VAT assessments

Assessments for VAT are usually made under Section 73(1) and 73(2), VATA 1994 and relate to prescribed accounting periods.

Where a return is missing, incorrect or incomplete, we have discretion under Section 73 over whether to raise an assessment, since the legislation says ‘may assess’.

In line with Parliament's intention, HMRC will normally issue and enforce an assessment, unless to do so would not fit with best net return principles or there are other exceptional circumstances.

Exercising discretion not to assess requires careful judgement based on the full facts of each case and appropriate management authority.

HMRC should not exercise this discretion just because the result feels unfair or because the customer says the position is tax neutral (see below).

Considering an application of the discretion - input tax error cases

A customer may ask you to exercise the discretion by not assessing or enforcing an amount where they incorrectly claimed VAT as input tax and say that their supplier accounted for the corresponding amount as output tax. The customer may argue that an assessment is unnecessary because the overall position is tax neutral.

In these circumstances you should avoid creating any expectation that HMRC will refrain from raising or enforcing an assessment. Tax neutrality cannot be presumed, as circumstances vary accross supply chains.

For example, a supplier may have absorbed part of the economic burden of the VAT charged and be entitled to retain that amount rather than reimburse the customer. In addition, HMRC may not have received or retained the corresponding amount from the supplier.

If a customer believes they have overpaid VAT to their supplier, this is a commercial matter between the two parties. The customer's remedy is to make a claim against the supplier (see VRM13000). The supplier may make a section 80 claim to HMRC and repay the customer. HMRC cannot pay the supplier without a valid claim.

However, there may be situations where applying the law strictly may not be the best course of action, for example if raising and enforcing an assessment would cost more than the amount of input tax to be recovered.

As stated above, such decisions should be exceptional, but each case must be judged on its own particular facts.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

Other legal powers of assessment can be found at VAEC1112.