VAT: HMRC did not use best judgment

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If inaccurate VAT returns are submitted, HMRC can replace those returns with its own assessments, but it must use “best judgement” to arrive at the assessed amounts, as Neil Warren explains.

Mostly repayments

The main problem in the case of Bonomini Associates Ltd (TC06102) was that the company submitted only two payment VAT returns in a four-year window between December 2010 and December 2014. These returns were for only £11.16 and £22.97 for the periods to March and September 2013 respectively, all other VAT returns submitted showed a repayment position.

This would not be an issue if the main trading activity involved zero-rated sales, such as a butcher or grocer shop, but the company provided design consultancy services which are always standard rated when provided in the UK. The reasons for the repayment returns were a mystery.

No consistency

HMRC adopted two different approaches to the four year period where there was a problem:

December 2010 to June 2012

The HMRC officer took the view that the business was not trading, due to its failure to produce business records and purchase invoices, so she raised assessments to cancel the net repayments shown on the VAT returns. By doing this HMRC disallowed all input tax claimed by the company, but also gave a credit for the output tax accounted for by the business.

July 2012 to December 2014

HMRC disallowed all input tax shown on the VAT returns but did not give any credit for output tax, these amounts were left unchanged. The principle adopted here was that the business was trading but not entitled to claim input tax because it: “failed repeatedly to provide copies of invoices or any alternative evidence.”

The law

The assessments were raised in accordance with VATA 1994, s73, which means an officer must use his or her “best judgment” to calculate the amount of tax considered to be due in the absence of either records or returns. However, the tribunal was critical of the assessments for two reasons which fall into these periods:

Dec 2010 to June 2012

The conclusion that the company was not trading was a fundamental error by the officer because there was evidence of trading on corporation tax returns submitted by the company for years until 31 March 2014. The credit for output tax meant that the assessments for these periods were “materially understated.” The judge noted that HMRC would be out of pocket because the output tax would almost certainly have been claimed as input tax by customers. But he decided not to correct these understatements and allowed the assessments to stand.

July 2012 to Dec 2014

The tribunal decided that it was unfair of HMRC to disallow all input tax claimed by the business, i.e. ‘nil’ input tax. It would be sensible to allow a “notional input tax recovery” – the judge decided this figure should be 5% of the output tax shown on the returns.


The strange issue in this case is that the company submitted repayment returns for 14 out of 16 VAT periods, which certainly looks to be incorrect. But there was no mention of either careless or deliberate errors which might be subject to a penalty. This may be because HMRC sympathised with the taxpayer’s explanations of computer crashes, ill health and bad debts suffered on major contracts.

The main learning point is that if HMRC issue a “best judgment” assessment, it is not only important to check the supporting calculations but also ask the question: Is this assessment based on fair and reasonable conclusions regarding the business’ trading structure? The answer in this case was a definite “no”.

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.


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25th Oct 2017 10:36

How bizarre. Have I read the judgement right and the total additional VAT owed is around £60,000? Yet the taxpayer appeared with no representation, no evidence to present and no argument of any substance to mitigate the amount sought?

I'm inclined to believe them when they say there are medical reasons for their situation.

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