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HMRC internal manual

VAT Accounting Manual

HM Revenue & Customs
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Use of estimation for completing VAT returns: considering the need for businesses to use estimation

In considering requests to estimate, you are making two decisions, using the delegated power in the estimation regulation. They are:

  • a decision that the business needs to use estimation; and
  • a decision to agree the method of estimation.

The following paragraphs deal with these in turn.

The legal test is that the business “is not able to ascertain the exact amount of input tax [or output tax]”. The concept of being unable to identify the correct amount of tax pre-supposes that reasonable steps have been taken to identify the exact amount of tax. The following paragraphs outline some common cases where there may be a need to use estimation.

(a) Force majeure. The decision will be most straightforward where something has happened which the business did not and could not foresee. The theft or destruction of records, or catastrophic computer failure are examples of cases where estimation may be necessary. It is important that estimation does not continue longer than is necessary and, in most cases, estimation should be necessary for only one period. Exceptionally it may be agreed in such cases for two periods.

(b) Business size and complexity. The Commissioners have agreed estimation in a number of cases where the size and complexity of the business means that the correct tax could not be established by the due date for the next tax return. Features of acceptable estimation cases have included decentralised purchasing systems or complex management approval processes. These cases usually involve estimation of input tax as a long-term feature of VAT accounting, and you should consider the guidance in the following section before approving estimation in such cases.