Challenging HMRC estimates of your income

Q: How does HMRC build the estimate?

There are three main building blocks. Business models. Most often a gross profit rate or mark up applied to purchases to arrive at expected sales (EM3502). Other ratios are possible, such as fuel to takings. Private side tests. Means tests, cash tests and capital statements compare what you had with what you spent (EM3550). These are covered in detail in capital statements and means testing in HMRC checks. Extension to other years. Under EM2012, where an understatement is found for the enquiry year and there is no reason to think it was not normal practice, the usual approach is to scale the figure back to earlier years using the Retail Prices Index. Fixed weekly amounts are scaled for inflation; irregular omissions may be turned into a percentage of turnover and applied to earlier years. EM3520 tells officers to check that a model's result fits what is known of your private life. Even then it can only be a judgement, on the balance of probabilities, that you had the use of the extra profits.

Q: What limits does HMRC's own guidance put on an estimate?

It must be fair. In Johnson v Scott (EM3705) the judge said the onus on the taxpayer is not "carte blanche to make wild or extravagant claims" and the figures must be a fair inference. EM3520 repeats that amendments and assessments must be best judgements in all the circumstances. Use the facts of your business. EM3502 says officers should not use a national or local average mark up unless there is no evidence at all of the actual mark up, and must state every assumption, such as wastage. EM3711 adds that averages cannot supplant actual figures. Allow for wastage and own use. EM3509 says a model gives a theoretical maximum before wastage, and EM3510 explains how goods taken for own use must be reconciled before comparing turnover. Continuity has to be evidenced. EM3236 says one under declaration in one year needs additional evidence before inferring errors in other years. The presumption of continuity alone does not justify increasing assessments; HMRC still needs evidence. Evidence against a sole trader is not automatically evidence against a company that later took over the business. Representative test periods. EM3502 says any test period must be representative and should be extended or changed if disputed.

Q: What evidence brings an estimate down?

Actual prices and costs. Contemporaneous price lists, supplier invoices, menus and till reports for the period, not today's prices. Wastage, breakage, theft and spoilage. Disposal records, insurance claims, stock counts and specific incidents put in precise terms, which EM3509 says officers should discuss. Own goods and staff consumption. How they were recorded, so the mark up is applied to the right cost of sales. Trading pattern changes. Closures, refurbishments, illness, a lost contract or a change of product mix, which show the enquiry year was different from earlier ones and undermine scaling back. Private side reality. Bank and card analysis proving your household actually lived on less than the model implies, or non taxable funds supported by documents. Commercial sense. If the estimate implies turnover, ratios or hours the business could not have achieved, show it.

When HMRC decides your records cannot be relied on, it estimates what your income really was, usually from a business model, a review of your private finances, or both, and then extends the result to earlier years. The estimate stands unless you show it is wrong, but HMRC’s own guidance says it must be a fair best judgement built on the facts of your business. The way to bring it down is to attack the assumptions with evidence.

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When is HMRC allowed to estimate rather than accept your figures?

An estimate usually follows a finding that the records behind the return are not reliable. HMRC’s Enquiry Manual at EM3502 says the results of a business model do not on their own give a conclusive figure to overturn the return. But if the officer has discredited the underlying records, the model provides a plausible computation of real profits. If there is no other reason to doubt the records, the model is just an alternative figure and the tribunal might prefer the return. That makes the reliability of your records the first battleground. Where the records are sound, an estimate has little to stand on.

The case law accepts estimates once records are rejected. In Coy v Kime, summarised at EM3711, a taxi driver’s notebook showing near identical takings every day was found not to be an accurate record, and the tribunal could then use a fuel to takings ratio and household spending survey figures. In Brittain v Gibb (EM3710), a decorator’s profits were estimated from a likely hourly charge multiplied by likely working hours.

How does HMRC build the estimate?

There are three main building blocks.

Business models. Most often a gross profit rate or mark up applied to purchases to arrive at expected sales (EM3502). Other ratios are possible, such as fuel to takings.
Private side tests. Means tests, cash tests and capital statements compare what you had with what you spent (EM3550). These are covered in detail in capital statements and means testing in HMRC checks.
Extension to other years. Under EM2012, where an understatement is found for the enquiry year and there is no reason to think it was not normal practice, the usual approach is to scale the figure back to earlier years using the Retail Prices Index. Fixed weekly amounts are scaled for inflation; irregular omissions may be turned into a percentage of turnover and applied to earlier years.

EM3520 tells officers to check that a model’s result fits what is known of your private life. Even then it can only be a judgement, on the balance of probabilities, that you had the use of the extra profits.

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What limits does HMRC’s own guidance put on an estimate?

It must be fair. In Johnson v Scott (EM3705) the judge said the onus on the taxpayer is not “carte blanche to make wild or extravagant claims” and the figures must be a fair inference. EM3520 repeats that amendments and assessments must be best judgements in all the circumstances.
Use the facts of your business. EM3502 says officers should not use a national or local average mark up unless there is no evidence at all of the actual mark up, and must state every assumption, such as wastage. EM3711 adds that averages cannot supplant actual figures.
Allow for wastage and own use. EM3509 says a model gives a theoretical maximum before wastage, and EM3510 explains how goods taken for own use must be reconciled before comparing turnover.
Continuity has to be evidenced. EM3236 says one under declaration in one year needs additional evidence before inferring errors in other years. The presumption of continuity alone does not justify increasing assessments; HMRC still needs evidence. Evidence against a sole trader is not automatically evidence against a company that later took over the business.
Representative test periods. EM3502 says any test period must be representative and should be extended or changed if disputed.

Who has to prove the figure is wrong?

Once an amendment or assessment is made and appealed, the burden moves to you. Section 50(6) of the Taxes Management Act 1970 says the tribunal reduces an assessment if it decides you are overcharged, but otherwise it stands. If HMRC asks the tribunal to increase an assessment, section 50(7) requires it to be satisfied that you are undercharged, and EM2012 notes HMRC needs evidence to support that. Where no reliable evidence of true profits exists, the tribunal makes its own best estimate (Brittain v Gibb). For extended time limits the position differs: HMRC must show the loss of tax was careless or deliberate, see how far back HMRC can go and burden of proof in tax appeals.

What evidence brings an estimate down?

Actual prices and costs. Contemporaneous price lists, supplier invoices, menus and till reports for the period, not today’s prices.
Wastage, breakage, theft and spoilage. Disposal records, insurance claims, stock counts and specific incidents put in precise terms, which EM3509 says officers should discuss.
Own goods and staff consumption. How they were recorded, so the mark up is applied to the right cost of sales.
Trading pattern changes. Closures, refurbishments, illness, a lost contract or a change of product mix, which show the enquiry year was different from earlier ones and undermine scaling back.
Private side reality. Bank and card analysis proving your household actually lived on less than the model implies, or non taxable funds supported by documents.
Commercial sense. If the estimate implies turnover, ratios or hours the business could not have achieved, show it.

How might a challenge work in practice?

Illustration only. A café owner declares sales of £150,000 on purchases of £60,000. HMRC applies a 200% mark up from current menu prices to all purchases and estimates sales of £180,000, then scales the £30,000 difference back four years. The owner produces the menus in force during the year, which show lower prices, plus records of food thrown away under hygiene rules and meals given to staff. Recalculated on those figures, the model supports sales of about £162,000. She also shows the café was refurbished and closed for six weeks in one of the earlier years, so a straight scale back overstates that year. The estimate is negotiated down to £12,000 for the enquiry year, with a smaller figure for the year of closure.

What if you cannot agree?

You can ask for a statutory review or appeal to the tribunal, see statutory review and the tax tribunal. HMRC’s guidance at EM3502 and EM2053 points officers to alternative dispute resolution where there is an impasse, see ADR in tax disputes.

What mistakes weaken a challenge?

Arguing about the arithmetic of the model while leaving the finding that the records are unreliable unanswered.
Accepting a mark up or wastage figure in an early meeting without checking the records.
Offering vague explanations without figures; EM2054 says statements without specific amounts carry little weight.
Letting the enquiry year result be applied to every earlier year without showing how trading differed.

For how mark up models are built, see HMRC business economics exercises.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.