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HMRC internal manual

VAT Accounting Manual

Use of estimation for completing VAT returns: agreeing a method of estimation

Once you have agreed that a business needs to use estimation, you need to agree a method. There are no hard and fast rules but as with the use of any discretion, the requirement is that you are reasonable. The following indicate some features of an acceptable estimation method:

  • It must be based on a genuine attempt to estimate the tax rather than a guess.
  • Especially in cases of long-term estimation, the proposed method must be based on a representative period. What is reasonable will depend on the value and extent both of the resources available to the business and of the estimation proposed.
  • Especially in cases of long-term estimation, the proposed method should seek to address the reason the need arises. For example, if the problem is that computer processing has to close down a week before the due date to finalise figures for the return, it would be reasonable to allow estimation if the postings in the week before the due date are mainly of input tax claimable in the previous period. It would be reasonable to base the estimation on the extent of such postings.
  • In considering methods that incorporate a time delay factor, consider the method by which the invoices are processed. It is not uncommon for the invoices in respect of larger purchases to be processed more speedily than those for smaller items.
  • The method of estimation should take account of changing business circumstances. This might be by a rolling calculation that determines the estimated tax by reference to the latest figures. Or it might simply be by agreeing to perform a new calculation at regular intervals.
  • The method should be subject to review. Either HMRC or the business can abandon an agreed method from a future date. It is nevertheless, good practice to agree a date for formal review of the procedure when long-term estimation is approved. The length of such a review period is to be based on risk, and should not normally exceed 3 years. In cases where the business using an estimation method is both large and complex it may well be advisable to have an annual review.