HMRC Best Judgment Assessments: What Happens When Your Records Are Missing or Incomplete

Not every business keeps perfect records. A fire, a failed hard drive, a bookkeeper who left mid-year, or simply years of disorganisation, all leave the same gap: when HMRC opens an enquiry, there isn't a complete set of records to hand over. That does not mean the enquiry is lost before it starts, but it does change how it plays out, and understanding HMRC's "best judgment" power is the first step to keeping control of it.

What "best judgment" actually means

Where HMRC cannot establish the correct tax liability from the records and information available, whether for VAT, income tax or corporation tax, it has the power to raise an assessment based on its own honest and reasoned estimate. This is generally referred to as a best judgment assessment. Critically, HMRC does not need to prove that figure is correct to the civil standard the way it would need to prove a specific fact; it only needs to show that the estimate represents a fair, honest attempt to arrive at the right answer using whatever information is available, industry benchmarks, bank statements, till records, supplier and customer data, or comparisons with similar businesses.

The long-standing test, set out in Van Boeckel v Customs and Excise Commissioners [1981] STC 290 and applied consistently since, is a low bar for HMRC to clear at the point of raising the assessment: HMRC must simply have considered the material fairly and reached a conclusion that is not wholly unreasonable or arbitrary. It does not have to carry out exhaustive enquiries, exclude every possible alternative explanation, or reach the objectively "correct" figure before assessing. That comes later, at the challenge stage.

Why missing records trigger an enquiry in the first place

HMRC's compliance activity increasingly starts from data it already holds, bank interest reporting, card processor and platform data, Land Registry records, and cross-references it against what has been declared. A mismatch, or a return that looks implausibly low for the scale of activity HMRC can see evidence of elsewhere, is what typically opens the enquiry. Once open, HMRC will ask for the underlying records: purchase and sales invoices, bank statements, till Z-readings for a cash business, mileage logs, and so on. It is the response to that request, not the original return, where a missing-records problem usually surfaces and starts to shape the rest of the enquiry.

How HMRC builds an estimate when records are incomplete

HMRC's internal guidance on best judgment sets out the general approach its officers are expected to take: use whatever reliable information exists, whether from the taxpayer, third parties, or general knowledge of the trade, to construct a reasoned figure, rather than picking an arbitrary or punitive number. In practice, the building blocks HMRC typically uses are bank statement analysis (identifying deposits that look like undeclared trading income), a mark-up or margin exercise (applying a gross profit percentage typical of the trade to known purchase figures to estimate expected sales), comparison with similar businesses in the same sector and locality, and, for cash businesses, observation evidence gathered during unannounced visits.

Each of these methods carries its own weaknesses, and each is a legitimate target for challenge. A bank analysis that fails to exclude personal transfers, loan receipts or gifts overstates income. A mark-up exercise built on the wrong comparator trade, or one that ignores genuine wastage, discounting or seasonal variation specific to the business, produces an inflated figure. A single day's observation extrapolated across a full year assumes every day looks like the one observed, an assumption that rarely survives close examination.

How the tribunal treats missing records and adverse inference

Where a case reaches the First-tier Tribunal, the missing-records problem does not disappear, but it is not treated as automatically fatal to the taxpayer's case either. Tribunals have consistently resisted the argument that the mere absence of documentation should give rise to a sweeping inference that a taxpayer's account cannot be accepted. Where documentation on a relevant point would ordinarily be expected to exist, the tribunal will consider why it is missing, and will weigh the credibility of any uncorroborated oral evidence accordingly, but an innocent and properly explained gap in the paperwork is treated very differently from an unexplained one.

This reflects a wider evidential principle, most authoritatively set out in Efobi v Royal Mail Group Ltd [2021] UKSC 33 and, before it, Wisniewski v Central Manchester Health Authority [1998] PIQR P324: a tribunal may draw an adverse inference from a party's failure to produce evidence or call an available witness, but only where there is no satisfactory explanation for the omission, and even then the inference must be a fair and proportionate response to the specific gap, not a blanket assumption of guilt. The tribunal in Eurolaser IT Ltd v HMRC [2025] UKFTT 405 (TC), upheld on further appeal at Eurolaser IT Ltd v HMRC [2025] UKUT 358 (TCC), applied exactly this reasoning: the absence of documentation on a relevant matter is a feature to be weighed within the overall factual picture, not a shortcut to a predetermined conclusion against the taxpayer.

Separately, contemporaneous documentary evidence, where it does exist, is generally treated as considerably more reliable than reconstructed recollection produced after the event, reflecting the well-established observation in Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm) that human memory is malleable and prone to unconscious reconstruction, particularly once a dispute has crystallised and a witness has an interest in a particular version of events. This cuts both ways: it is exactly why keeping even basic contemporaneous records, a diary, a simple spreadsheet, a folder of bank statements, matters so much more than most business owners realise until an enquiry lands.

How these enquiries typically unfold

Case A: The bookkeeper who disappeared

A sole trader's bookkeeper leaves abruptly partway through the year, taking access to the cloud accounting software with her, and the trader is unable to regain access or produce a full set of sales invoices for a five-month period. HMRC opens an enquiry after a bank-data mismatch and raises a best judgment assessment for the gap period based on a mark-up applied to purchase invoices, which the trader does still hold. Because the trader can produce the purchase invoices, full bank statements for the period, and a dated email chain showing the attempted, unsuccessful recovery of the accounting software access, the tribunal accepts the explanation for the gap and works from the trader's reconstructed figures, based on the purchase and bank evidence, rather than HMRC's cruder mark-up estimate, materially reducing the assessment.

Case B: The gap that HMRC couldn't overlook

A takeaway business produces till records for most of the year under enquiry but has a conspicuous six-week gap that happens to coincide precisely with the period HMRC's observation visit identified a discrepancy between footfall and declared sales. No explanation is offered for the gap beyond "the till was playing up." HMRC's assessment, built on extrapolating the observed discrepancy across the full year, is substantially upheld by the tribunal, which draws an adverse inference from the unexplained and suspiciously well-timed absence of records precisely for the period in question, while still requiring HMRC to justify why a single day's observation was a fair basis for a full-year extrapolation, reducing the figure somewhat but not displacing the assessment's core finding.

Responding when your records have gaps

The first priority, before HMRC even asks, is establishing exactly what does and does not exist: bank statements can usually be obtained retrospectively from the bank even where original paperwork is lost, and often provide the single most persuasive secondary evidence available. Supplier and customer records, correspondence, and any digital trace of the business, invoicing software logs, payment platform records, can all help rebuild a credible picture even where the primary records are gone.

Where a genuine gap exists, the honest, proactive approach, disclosing the gap, explaining it clearly and specifically, and providing whatever secondary evidence is available, consistently produces a better outcome than waiting for HMRC to discover the gap and draw its own conclusions about why it exists. Where HMRC's resulting estimate looks disproportionate to the actual scale of the business, that estimate is not the end of the process: it can be challenged with better evidence, and the tribunal's role, once a case is appealed, is to find the correct figure on the evidence before it, not simply to rubber-stamp HMRC's original best judgment estimate.

Related guides in this series

• Self-assessment enquiry: full guide
• What documents must you give HMRC?
• Discovery assessments: the complete guide
• Reasonable excuse: the complete guide
• R&D tax relief enquiries: HMRC’s compliance crackdown explained
• Can you sue your accountant? Professional negligence after an HMRC penalty
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