Issues

Challenging A Best-Judgment VAT Assessment

HMRC has assessed VAT it thinks you owe—often after a control visit or mark-up exercise—and the number looks too high. How a best-judgment assessment works, whether it is in time, why attacking HMRC's method rarely wins, and the pay-or-deposit rule that can block your appeal.

Liam Williams

Liam Williams

— 17 min read
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A VAT officer has visited, looked at your records, and decided you owe more VAT than you declared. A few weeks later a notice of assessment arrives with a number on it—and the number looks too high. Maybe it covers periods you thought were settled. Maybe it is built on a mark-up the officer applied to a few sample weeks and then projected across years.

The first thing to know is that you can challenge this. The second is what to challenge. A VAT assessment is not the final word, but the way you fight it matters enormously—and the single most common mistake is to attack how HMRC reached the figure rather than the figure itself.

Before anything else, note the date on the notice. You have 30 days to appeal, under section 83G of the VAT Act 1994—a different deadline rule from income tax, but the same length. That clock runs whether or not you can afford to pay the disputed VAT. File first; sort out payment and hardship separately.

This article is about the assessment—the VAT HMRC says you owe. If your letter is really about a penalty charged on top, that is a separate regime with its own defences, and our guide to VAT penalties and appeals is the better fit. Here we deal with the assessment itself: where HMRC's power comes from, whether it is in time, the "best judgement" standard and why it so rarely wins on its own, and what you actually have to prove.

What A Best-Judgment Assessment Is

When HMRC believes your VAT returns are wrong—or you have not filed them—it does not have to prove the exact figure before raising a bill. It can estimate.

The power sits in section 73(1) VATA 1994. Where a person has failed to make returns, failed to keep documents or let HMRC verify the returns, or where it appears to HMRC that the returns are incomplete or incorrect, HMRC "may assess the amount of VAT due from him to the best of their judgment and notify it to him." (Related subsections deal with over-claimed input tax and repayments that were wrongly paid out.)

That phrase—"to the best of their judgement"—is the heart of it, and it is unique to VAT. For income tax, HMRC raises a discovery assessment under section 29 of the Taxes Management Act 1970 with no equivalent constraint on how the figure is built. For VAT, the law requires the officer to use genuine, reasoned judgement. That gives you a ground of challenge that does not exist in direct tax—but, as we will see, it is a far weaker ground than it first appears.

These assessments are most often raised against cash-heavy businesses: restaurants, takeaways, pubs, market traders, taxi firms, small shops. The officer typically takes a sample on a control visit—a few weeks of till rolls, some test purchases, supplier invoices—works out a gross-profit mark-up, and projects it across the assessment period. If the records are thin or the declared takings look low against the purchases, the officer fills the gap with an estimate. A suppression exercise (HMRC's term for hidden sales) works the same way.

The result is an appealable decision. Section 83(1)(p) VATA 1994 gives a right of appeal against a section 73 assessment "or the amount of such an assessment." That short tail matters: it confirms you can appeal the quantum—the number—not just whether HMRC was entitled to assess at all.

What The Assessment Looks Like

The document that arrives is a notice of assessment, usually on form VAT655. Internally, the officer raises the figures on a form VAT641 first; what lands on your desk is the VAT655 notice. It lists each prescribed accounting period assessed, the VAT for each period, and a total. It often arrives on its own—a separate penalty notice, if there is one, comes in its own envelope.

Read the period dates first. They drive the time-limit check below: a single notice can cover several quarters, and one or more of them may be out of time even if the rest are good. Then check whether a separate penalty letter also arrived—because the penalty is a different fight, with the burden the other way round (more on that below).

Is The Assessment In Time?

Before you argue about the figure, check the dates. An assessment that is out of time is invalid however good HMRC's mark-up was—and VAT has two layers of time limit. Both must be satisfied.

The Inner Limit: Section 73(6)

Section 73(6) VATA 1994 is the limit that bites first in practice. An assessment must not be made after the later of:

  • two years after the end of the prescribed accounting period; or
  • one year after "evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge."

The second of these—often called the one-year rule or the "evidence of facts" date—is the most heavily litigated point in VAT assessment law. The clock starts running not when HMRC first becomes suspicious, but when it has gathered enough evidence to justify making the assessment. If HMRC sat on sufficient evidence for more than a year before raising the assessment, it may be out of time on that period—and that is a question of fact about what HMRC knew and when.

Section 73(6) also allows HMRC to make a further assessment if later evidence comes to light, so a first assessment being in time does not necessarily close off a later, larger one.

The Outer Longstop: Section 77

Whatever section 73(6) allows, the assessment is also subject to section 77 VATA 1994, the overall longstop.

The general cap in section 77(1) is that no assessment may be made more than four years after the end of the prescribed accounting period. That four-year figure is the one most people have heard of—but it is the outer limit, not the inner one, and it does not replace the section 73(6) two-year / one-year test.

The longstop extends to twenty years under section 77(4), but only in the specific cases listed in section 77(4A):

  • a VAT loss brought about deliberately by the taxpayer (or someone acting on their behalf);
  • participation in a transaction known to be connected with arrangements to bring about a VAT loss;
  • a loss attributable to a failure to notify a liability to register; or
  • a loss attributable to an undisclosed avoidance scheme.

Section 77(4B) adds that a "deliberate" loss includes one arising from a deliberate inaccuracy in a document given to HMRC. The practical point: HMRC cannot reach back twenty years at will. It needs one of those triggers—most commonly an allegation of deliberate behaviour—and if the trigger is wrong, so is the extended period.

If the assessment in front of you covers periods more than four years old, the first question is whether HMRC has alleged (and can show) a section 77(4A) trigger. A failure-to-notify case is one common route in: a late VAT registration can hand HMRC a long window to assess the unregistered period. Our guides to VAT registration when you run a UK company from abroad and VAT registration delays and queries cover how those registration findings arise.

The "Best Judgement" Standard—And Why It Rarely Wins

It is tempting to read "to the best of their judgement" as an invitation to pick HMRC's method apart: the sample was too short, the mark-up too high, the wastage allowance too mean. That instinct is natural—and it usually loses. Here is why.

The standard was set out by Woolf J in Van Boeckel v Customs and Excise Commissioners [1981] STC 290. He held that the Commissioners must make an assessment that is fair, reached honestly and bona fide, having fairly considered all the material placed before them, and amounting to a decision which is reasonable and not arbitrary. Crucially, he also held HMRC is under no obligation to do the taxpayer's work—the officer need only make a reasoned estimate on the material available, and an element of guesswork is inherent, the law asking only that it be honest guesswork. An assessment is not invalid merely because the tribunal, looking again, would have reached a different figure.

The Court of Appeal raised the bar further in Rahman v Customs and Excise Commissioners (No 2) [2002] EWCA Civ 1881. A tribunal should not treat an assessment as invalid merely because it disagrees with how the officer's judgement was exercised. A "much stronger finding" is needed—that the assessment was reached "dishonestly or vindictively or capriciously," was "a spurious estimate or guess in which all elements of judgment are missing," or was "wholly unreasonable." In substance, the court said, those tests are indistinguishable from the familiar Wednesbury principles of unreasonableness in public law.

Then came the case that ties it all together. In Pegasus Birds Ltd v Customs and Excise Commissioners [2004] EWCA Civ 1015, Carnwath LJ gave the tribunal four points of guidance on how to handle "best of their judgement" arguments. The first is the one to remember:

The Tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material properly available to it, the burden resting on the taxpayer. In all but very exceptional cases, that should be the focus of the hearing.

Two more strands from the same judgment matter for you. First, a best-judgement assessment is treated as prima facie right, despite the guesswork built into it—the burden of displacing it lies on the taxpayer. Second, the court said it is "only in a very exceptional case" that an assessment will be upset because HMRC failed to exercise best judgement; in the normal case "the important issue will be the amount of the assessment." The relevant question about method is narrow: was the mistake "consistent with an honest and genuine attempt to make a reasoned assessment," or so serious that "no officer seeking to exercise best judgment could have made it"?

The takeaway is blunt. Attack the number, not the method. Picking holes in HMRC's methodology, on its own, rarely gets you anywhere—the bar is dishonesty, caprice or wholesale unreasonableness, not "I would have done it differently." What moves the figure is showing the tribunal what the correct figure is.

A Worked Mark-Up Example

It helps to see how a mark-up assessment is built—and where it can be pushed back. Say an officer test-checks four weeks of a takeaway's till rolls, works out a gross-profit mark-up on cost, and applies that percentage to a full year's purchase invoices. The result is an asserted sales figure well above the takings you declared. The officer treats the gap as suppressed standard-rated sales and assesses the VAT on it, spread across the quarters in the assessment.

The counter-move is not to complain that four weeks is too short. It is to rebuild the mark-up correctly. If the officer used a gross mark-up that ignores wastage, staff meals, promotions, or zero-rated lines (cold takeaway food, for instance), then putting realistic figures back in lowers the mark-up—and a lower mark-up applied to the same purchases produces a lower sales figure, and a lower VAT bill. If a defensible wastage and staff-meals allowance cuts the assumed mark-up from, say, 220% to 180%, the asserted sales fall, and so does the assessment. You have not argued the method was dishonest; you have shown the figure is wrong, which is what the tribunal is there to decide.

That said, a methodological flaw is not always a dead end—occasionally it is so fundamental that it actually shifts the number. In Homsub Ltd v HMRC [2019] UKFTT 536 (TC), HMRC assessed a Subway franchise on the basis of transaction counts rather than transaction values, which overstated the proportion of standard-rated sales (a single sale might pair a hot drink—standard-rated—with a cold sandwich—zero-rated). That was the rare case where a methodological error genuinely fed through into the figure. But notice what won it: not an abstract complaint about HMRC's approach, but a demonstration that the method produced the wrong amount.

The Burden Is On You

This is the part that surprises people, so it is worth stating plainly: on a VAT assessment, the burden of proof is on you, the appellant.

The tribunal's job is to find the correct amount of tax, and—as Pegasus Birds makes clear—it starts from the assessment as prima facie right and looks to you to show it is wrong. That is the opposite of the position on a penalty, where HMRC must prove the behaviour and the penalty before anything bites. Keep the two straight: the assessment (your burden to displace the figure) and any penalty charged alongside it (HMRC's burden) are different fights, even when they land in the same envelope. Our VAT penalties guide deals with the penalty side.

In practice, discharging your burden means producing evidence of the right number:

  • the actual records for the assessed periods—till rolls, bank statements, sales and purchase invoices, stock records;
  • a reconstruction of takings where the records are incomplete, with the assumptions spelled out;
  • an alternative mark-up or gross-profit calculation, with your own figures for wastage, staff meals, promotions, and zero-rated or reduced-rate sales the officer may have ignored;
  • anything that explains why declared takings look low—a change in trade, a refurbishment, a bad patch, a shift in product mix.

In practical terms, that means doing concrete things rather than collecting grievances:

  • Rebuild takings from till Z-readings and bankings, so you have a figure that comes from your own records rather than the officer's projection.
  • Recompute the mark-up from your actual purchase invoices, with a defensible allowance for wastage, staff meals and promotions—and check for zero-rated or reduced-rate lines the officer treated as standard-rated.
  • Test whether the sample was representative. If the officer's sample weeks fell during a refurbishment, a heatwave, a one-off event, or any other untypical patch, the projection across the year is skewed.
  • Ask HMRC for the officer's working papers—the schedule of calculations behind the assessment. You are entitled to understand how the figure was built, and you cannot rebut what you cannot see.

You do not have to prove HMRC acted in bad faith. You have to persuade the tribunal of the correct figure, on the balance of probabilities. The strongest appellant turns up with records and an alternative number, not with a grievance about the officer's method.

The Pay-Or-Deposit Rule And Hardship

VAT has a feature income tax does not, and it catches businesses off guard: in most cases you must pay or deposit the disputed VAT before the tribunal will hear your appeal.

Under section 84(3) VATA 1994, an appeal on the matters listed there—which includes section 83(1)(p) assessments—"shall not be entertained" unless the amount HMRC has determined to be payable has been paid or deposited with them. This is a jurisdictional bar: without payment or a deposit, the tribunal cannot hear the case.

There is an important escape hatch: hardship. Under section 84(3B), the appeal is to be entertained despite non-payment if either HMRC is satisfied—on your application—that paying or depositing the VAT "would cause the appellant to suffer hardship," or, where HMRC is not satisfied, the tribunal decides that it would. And under section 84(3C), the tribunal's decision on hardship is final—there is no onward appeal on that point.

Two practical points flow from this:

"Made" versus "entertained." Your appeal can be validly made—filed within the 30 days—without paying. The pay-or-deposit rule only stops it being entertained (heard). So the deadline runs regardless of payment: file first, then deal with payment or apply for hardship. Letting payment delay your filing is how a good appeal becomes a late appeal you then have to argue your way back into.

This applies to the VAT, not the penalty. The pay-or-deposit rule bites on the VAT in the assessment. A penalty or interest charged alongside it can be appealed without paying first. Do not pay a penalty to get an assessment heard.

How to apply for hardship—the minimum to act. Apply to HMRC first, in writing, at the same time as your appeal. If HMRC refuses, you ask the tribunal to decide. What helps a hardship application is evidence that paying now would bite: recent management accounts, bank statements, a cash-flow forecast, and evidence that you have no available borrowing and no realisable non-business assets to cover the bill. The fuller how-to lives in the dedicated guide below.

How hardship is judged—the forward-looking test, what counts (and what does not), and how to apply—is the subject of its own guide. The leading authority is Elbrook (Cash & Carry) Ltd v HMRC [2017] UKUT 181 (TCC): hardship looks at whether paying now would cause real difficulty, available borrowing and non-business assets are relevant, and simply preferring to keep your money is not hardship. For the full how-to, see our guide to postponing payment during an appeal.

When An Error Correction Turns Into An Assessment

Many assessments do not start with a control visit at all—they grow out of an error correction. It helps to understand the route, because the way you correct an error affects what happens next.

If you spot a mistake in a past VAT return, the rules in VAT Notice 700/45 give you two methods, depending on the size of the net error:

  • Method 1—adjust your next return. You can correct the error on your next VAT return if the net value is £10,000 or less, or if it is between £10,000 and £50,000 but does not exceed 1% of your box 6 figure (your net outputs / total sales).
  • Method 2—a separate notification to HMRC. You must use Method 2 if the net errors exceed £50,000, or if you made the errors deliberately. You do this with an error-correction notification (online, or in writing to HMRC's VAT Error Correction Team)—the old VAT652 paper form was withdrawn on 8 September 2025 and can no longer be used.

Correcting an error does not, by itself, mean an assessment or a penalty—but it can lead to either. Interest may run on under-declared VAT, and a penalty may follow under the inaccuracy rules, covered in our VAT penalties guide.

The assessment comes in when HMRC, rather than you, decides the return was wrong—rejecting an adjustment you claimed, or concluding from a visit that the returns were incomplete. It then raises a section 73(1) best-judgement assessment, and that is the appealable decision under section 83(1)(p). At that point the analysis above applies in full: check the time limits, work out the correct figure, and remember the burden is on you.

A VAT control visit is, in effect, the VAT equivalent of an income-tax enquiry. To see how the direct-tax version works (enquiry, then closure notice or discovery), our guide to HMRC enquiries and closure notices draws the parallel.

How To Appeal The Assessment

The appeal goes to the First-tier Tribunal (Tax Chamber), and there is no fee to bring it. Here is the shape of it.

Note the deadline. You have 30 days from the date of the assessment to appeal, under section 83G VATA 1994. This is the VAT appeal deadline—a different statutory home from the income-tax provisions in the Taxes Management Act, but the same length and the same tribunal.

Know what happens if you miss it. If the 30 days pass without an appeal, the assessment stands and becomes a debt HMRC can enforce—it can pursue the VAT like any other money you owe. You are not necessarily shut out, but you are forced onto the harder late-appeal route, where you have to explain the delay and persuade the tribunal to let you in before it will even look at the figure. It is far easier to file on time than to argue your way back.

Consider a review first. Before going to the tribunal you can accept HMRC's offer of a statutory review, where a different officer takes a fresh look within 45 days. A review is free and does not stop you appealing afterwards—if it upholds the assessment, you get a fresh 30 days to appeal from the conclusion of the review. A best-judgement assessment is often a good review candidate: a fresh officer can be shown your corrected records cheaply, and the process buys you a fresh 30 days. Our HMRC internal review guide explains how it works.

File the appeal. You can appeal online through the GOV.UK portal or by post using Form T240—the same mechanics as any indirect-tax appeal. Our how to appeal to the tax tribunal guide walks through the form.

Get your grounds right. Good grounds of appeal against an assessment address both questions the tribunal will ask: was the assessment validly made to best judgement, and—the one that usually matters—what is the correct amount? Lead with the figure. Our guide to writing grounds of appeal covers how to structure this so the quantum argument is front and centre.

Know what the tribunal cannot do. The tribunal can decide whether the assessment is valid, whether it is in time, and what the right figure is. It cannot order HMRC to be lenient or to act "fairly" outside the law—"the officer was unfair to me" is not a freestanding ground. That is the limit explained in our analysis of Hok v HMRC; a fairness complaint goes to HMRC's complaints process or, ultimately, judicial review, not the tax tribunal.

Most assessment appeals take typically 6-12 months to resolve. Throughout, late-payment interest runs on unpaid VAT at 7.75%, and interest cannot be appealed—so an appeal that drags on still carries a cost even if you win on part of the figure. Interest runs from each period's original due date, so on a multi-year assessment it stacks up into a large sum by the time of the hearing. The flip side: because interest is charged on the VAT, reducing the assessed VAT reduces the interest proportionately—a win on the figure cuts the interest too. Our guide to interest on unpaid tax explains how it accrues.

What To Do Now

  1. Note the deadline. 30 days from the date of the assessment (section 83G). File first—do not let payment questions eat into the window.
  2. Check the dates. Is the assessment within section 73(6) (two years, or one year from sufficient evidence) and within the section 77 longstop (four years, or twenty only on a deliberate / failure-to-notify / scheme trigger)? An out-of-time assessment is invalid whatever the figure.
  3. Build the correct number. Gather records for the assessed periods and prepare an alternative calculation—your own mark-up, your own takings reconstruction. This is where appeals are won, because the burden is on you.
  4. Resist the urge to fight the method alone. "Best judgement" is a weak standalone ground (Pegasus Birds). Use any methodological flaw to show the figure is wrong, not as an argument in its own right.
  5. Plan for payment or hardship. Be ready to pay or deposit the disputed VAT, or to apply for hardship under section 84(3B) if paying would genuinely cause your business difficulty.
  6. Get help if you are unsure. A Chartered Tax Adviser or accountant can be engaged for a single piece of work, and free help is available from TaxAid (taxaid.org.uk) and the Low Incomes Tax Reform Group (litrg.org.uk).

Key Legislation And Resources

Legislation

  • Section 73, VATA 1994—the power to assess "to the best of their judgement" (s.73(1)) and the inner time limits (s.73(6): two years, or one year from sufficient evidence)
  • Section 77, VATA 1994—the outer time-limit longstop (four years; twenty years only on a s.77(4A) trigger)
  • Section 83, VATA 1994—appealable decisions, including s.83(1)(p) "an assessment … or the amount of such an assessment"
  • Section 83G, VATA 1994—the 30-day deadline to bring a VAT appeal
  • Section 84, VATA 1994—the pay-or-deposit rule (s.84(3)) and the hardship exception (s.84(3B); the tribunal's hardship decision is final under s.84(3C))

Key Cases

HMRC Guidance

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This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax adviser, accountant, or solicitor.

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