Reasons for unexplained deposits in bank account

For four periods to June 2019 the taxpayer declared sales of £262 346 on its VAT returns but banked £422 308 into its business bank account. In the absence of satisfactory evidence to account for the extra sums deposited the HMRC compliance officer treated them as standard-rated sales and assessed output tax. The taxpayer appealed. The company director explained that the differences arose as a result of an adjustment for debtors ie sales from the previous period now being paid; injections of money from the director; a loan from an associated company; and advance payments made by customers.

The director claimed that the company provided a service only to manufacturers of goods based in Pakistan so no output tax was due. HMRC said this business model was not credible and that imported goods were being sold – hence the bankings difference. To complicate matters customers...