VAT best judgement assessments

Where VAT returns are missing, incomplete or incorrect, or records are inadequate, section 73(1) of the Value Added Tax Act 1994 lets HMRC assess the VAT due “to the best of their judgement”. The assessment must be based on real material and reached reasonably, not arbitrarily. You can appeal to the tribunal within 30 days if you made a return for the period, but challenges usually succeed by reducing the amount rather than by having the whole assessment struck out.

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When can HMRC raise a best judgement assessment?

Section 73(1) VATA 1994 gives the power where a person has failed to make returns, has failed to keep the documents and afford the facilities needed to verify returns, or where returns appear to HMRC to be incomplete or incorrect. HMRC may then assess the VAT due to the best of their judgement and notify it. Once notified, the amount is deemed to be VAT due and can be recovered unless it is withdrawn or reduced (section 73(9)).

Similar wording appears elsewhere. Section 73(7) allows a best judgement assessment where a business cannot account for goods it acquired, and HMRC’s VAT Assessments and Error Correction manual (VAEC1410) lists further provisions using the same test. Assessments under section 73(2) to recover repayments wrongly made do not mention best judgement, but VAEC1410 says HMRC’s policy is to apply the same standard.

These assessments often follow a VAT compliance check where the officer concludes declared takings are too low.

What does “best judgement” actually require?

The leading case is Van Boeckel v Customs and Excise [1981] STC 290. VAEC1420 summarises its principles:

HMRC are not required to do the taxpayer’s work for them;
they must act honestly and above board;
they must fairly consider all the material before them and reach a decision that is reasonable and not arbitrary; and
there must be some material on which to base the judgement.

Later tribunal decisions added that facts should be objectively gathered and intelligently interpreted, calculations arithmetically sound and samples representative. VAEC1420 also stresses that best judgement does not mean the best or most favourable result for HMRC; it means a reasonable process. Where a business provides little or no information, VAEC1450 says HMRC are justified in assessing on what they have, including estimates at the higher end of the range, and the onus moves to the business to disprove the figure.

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How does HMRC work out the figure?

VAEC1460 says there is no single correct method; the officer should choose the most reasonable method for the business and records involved, and ideally support it with a second method. The manual’s examples, drawn from tribunal decisions, include:

Observations: officers watching trade over several sessions and comparing customer numbers or spending with declared takings (VAEC1470).
Invigilation: an officer present for a full trading period, with the takings that day compared to normal declared figures (VAEC1480).
Mark up: applying a weighted mark up to purchases, sometimes using supplier records to identify unrecorded purchases (VAEC1490).
Till and other analysis: gaps in consecutive Z readings, or figures from a direct tax investigation (VAEC1500).

HMRC’s own guidance (VAEC1540) tells officers to make allowances for wastage, stock losses, seasonal fluctuations, closures and discounted sales where justified, to use a representative period, ideally agreed with the business, to check calculations, not to inflate an assessment to force the business to produce evidence, and where possible to send a letter setting out the proposed assessment before issuing it. VAEC1510 adds a credibility test: could the business actually have under declared this much? These points are a ready made checklist for testing an assessment.

What about central assessments when a return is missing?

If a VAT return is not submitted, HMRC’s systems can issue a centrally calculated assessment, which HMRC call a prime assessment. VAEC1530 confirms these are made under section 73(1) and must meet the same best judgement standard. Section 83(1)(p) only gives a right of appeal against a section 73(1) assessment for a period for which the appellant has made a return, so VAEC2110 states there is no right of appeal against a prime assessment. The remedy is to submit the return: VAEC2270 says a return received after a prime assessment automatically overrides it on HMRC’s system, although a return showing less than the assessment may be referred for checking.

Repeated failures carry a sting. Under section 73(8), where a previous assessment for a missed return was paid but no proper return followed, HMRC may set a later assessment for another missed return at a higher amount than they would otherwise consider appropriate.

What time limits apply?

Under section 73(6), an assessment must be made by the later of two years after the end of the VAT period and one year after evidence of facts, sufficient in HMRC’s opinion to justify it, comes to their knowledge. This is subject to the overall limits in section 77: normally four years after the end of the period, extended to 20 years where the loss of VAT was brought about deliberately, involved knowing participation in arrangements to cause a loss of VAT, or resulted from a failure to notify. HMRC can make further assessments if further evidence emerges later.

How do you challenge a best judgement assessment?

Appeal under section 83(1)(p) VATA 1994. For VAT the appeal goes to the First tier Tribunal within 30 days of the decision letter, or within 30 days of the conclusion of an HMRC review if you choose one (section 83G); see statutory review and the tax tribunal and, if you have missed the deadline, late appeals. Section 84(3) means the tribunal will not hear the appeal unless the assessed VAT is paid or deposited, or a hardship application is accepted; see postponing tax pending an appeal.

The tribunal looks at two questions in turn.

Was the assessment made to best judgement at all?

This is a high bar. VAEC1430 summarises the High Court in Rahman: an assessment will rarely fail the test, and a tribunal should not treat it as invalid simply because it would have exercised judgement differently. It needs a finding that the assessment was reached dishonestly, vindictively or capriciously, was a spurious estimate or guess lacking any element of judgement, or was wholly unreasonable. Under Pegasus Birds [2004] EWCA Civ 1015 (VAEC1440), even a defect in one element does not automatically set aside the whole assessment; the question is whether justice can be done by amending the amount. If an assessment is found invalid, VAEC1520 notes HMRC may replace it if still within time.

Is the amount right?

This is where most appeals are won or lost. VAEC1431 confirms the onus is on the business to show the assessment is wrong, and that the tribunal can reduce it while still holding it was made to best judgement. Effective evidence includes reconstructed records, wastage and staff meal data, evidence that an observation day was unrepresentative, supplier statements and an alternative calculation that is itself credible.

A worked example

Illustration only. A café declares annual sales of £150,000. An officer applies a 200% mark up to £60,000 of purchases, giving expected sales of £180,000, and assesses VAT on the £30,000 difference. The owner shows that £6,000 of purchases were wasted or eaten by staff and that £10,000 of the purchases were for outside catering jobs already invoiced and declared separately, so they should not be marked up again. The tribunal is unlikely to find the assessment was not to best judgement, because the method was reasonable, but it may reduce the amount substantially.

What are the common mistakes?

Arguing only that the assessment is invalid. Without evidence on the amount, the appeal usually fails.
Ignoring HMRC’s pre assessment letter instead of supplying explanations and records then.
Appealing a central assessment instead of filing the missing return.
Not paying or applying for hardship, so the appeal cannot be heard.
Failing to correct the underlying record keeping, which invites further assessments and penalties; see correcting VAT errors.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.