How Does HMRC Calculate Tax Assessments?

How Does HMRC Calculate Tax Assessments Overview

How Does HMRC Calculate Tax Assessments? This post arises in respect of VAT assessments by HMRC which are based on the ‘best of their judgment‘. Similar principles will apply with respect to other taxes.

The issues were raised in the case of Crutchley (t/as Victoria’s Hair and Beauty) v Revenue & Customs (VAT – inaccurate prime records) [2020].

When Is A Tax Assessment Raised By HMRC?

Tax is a regime based on self-assessment for the taxpayer to determine in the first instance. So when either the taxpayer’s own return is deemed insufficient or simply not provided, HMRC will step in and take the bull by the horns.

Bear in mind, it is the taxpayer that ought to know accurately what the tax to be paid ought to be. It is the taxpayer that has engaged in the relevant transactions and it is the taxpayer that should have the records for them. It is the taxpayer that therefore should report to HMRC on the same.

However, it is a fact of life that not only is there certainty about death and taxes but also that some taxpayers do not file returns on time (or at all), some taxpayers make mistakes on their returns and also that there are returns where HMRC considers the reported figures to be incorrect and insufficient. It is of course axiomatic that HMRC is going focus a potential tax enquiry in cases of suspected inaccuracy and or insufficiency, rather than a taxpayer that might have filed a return indicating that it owes more tax to HMRC than it necessarily does.

How Does HMRC Calculate The Tax Assessment To Best Judgment?

HMRC is required to act fairly to consider all material placed before it and, on that material, come to a decision which is reasonable as to the amount of tax which is due. As long as there is some material on which HMRC can reasonably act, then it is not required to carry out investigations which may or may not result in further material being placed before them.

HMRC must act reasonably ie. it is not supposed to engage in guessing games to assess the tax on the one hand but on the other hand, HMRC is not required to get it perfectly correct either. The rationale for that is presumably because it is the taxpayer who knows and if the taxpayer disagrees with HMRC it can appeal the assessment and present evidence of an inaccurate assessment by putting the correct figures before HMRC.

In the case of Walsh v Revenue & Customs [2018] UKFTT 519 (TC) the burden with respect of raising assessment was explained:

In Van Boeckel v Customs and Excise Commissioners [1981] STC 290 Woolf J identified the obligations placed on HMRC in order to come to a view as to the amount of tax to the best of their judgment. Assuming that there is some material before HMRC on which they can base their value judgment, they must perform that function bona fide but they “should not be required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which, to their best judgment, is due“. In Rahman (trading as Khayam Restaurant) v Customs and Excise Commissioners [1998] STC 826 Carnwath J commented on Woolf J’s guidance and added that in order for a tribunal to treat an assessment as invalid, it needs to find, for example, that the assessment has been reached “dishonestly or vindictively or capriciously” or that it is a “spurious estimate or guess in which all elements of judgment are missing”, being in substance “tests [that] are indistinguishable from the familiar Wednesbury principles.