In Homsub Limited v HMRC [2019] UKFTT 536 (TC), the FTT has clarified the relevant principles to be applied in determining whether an assessment has been made to “best judgement”, for the purposes of section 73(1), VATA.


Homsub Ltd (Homsub) is a franchisee in respect of Subway products selling hot and cold food and drinks to be consumed on or off the premises. It operated from five different stores in five towns, with the various outlets being within the business and accounting for VAT within one single company VAT return each quarter. From 1 January 2015, Homsub offered a “meal deal” promotion whereby several products were provided together for one price.

HMRC was concerned that the percentage split between supplies which attracted VAT and those that did not was at an inappropriate level. Additionally, the meal deal promotion of £3 was accounted for by a £2.99 apportionment for the sandwich (hot or cold) and £0.01 for the drink (fizzy or hot beverage attracting VAT, or bottled water attracting no VAT) such that if VAT was payable on the drink, it was 20% of £0.01.

HMRC visited the five stores to carry out an invigilation exercise, recording each sale made and whether it was “eat in” or “take out” and “hot” or “cold” to account for the different VAT treatments of the products sold. The transactions per outlet which did and did not attract VAT were then added up to provide a percentage of the sales which were liable to VAT.

Following the invigilation exercise, HMRC issued a notice of assessment in respect of undeclared VAT caused by the under recording of standard rated sales (the Assessment).

On review, the Assessment was upheld and revised upwards because the assessing officer had used the net figure declared on the VAT returns rather than the gross sales declared.

Homsub appealed to the FTT on the basis that the Assessment was not made to “best judgement”, for the purposes of section 73(1), VATA.

FTT decision

Homsub’s appeal was allowed.

The FTT referred to Van Boeckel v Customs & Excise Commissioners [1981] STC 150 and Rahman (No2) v HMRC [2003] STC 150, and the following principles which emerge from those decisions which have to be considered when evaluating best judgement assessments:

  1. HMRC had to be in possession of some material upon which a best judgement could be properly based;
  2. HMRC is not required to undertake work which the taxpayer would ordinarily undertake to arrive at a conclusion about the exact amount of tax due;
  3. HMRC was entitled to exercise its best judgement power by making a value judgement on the material available to it;
  4. the FTT should not treat an assessment as invalid simply because it takes a different view as to how the best judgement could or should have been applied to the material available to HMRC; before the FTT interfered, it had to be satisfied that the purported best judgement assessment was wholly unreasonable; and
  5. the FTT had to start by assuming HMRC had made an honest and genuine attempt to arrive at a fair assessment.

In the view of the FTT, the methodology used by HMRC was “significantly flawed” such that it was wholly unreasonable and unfair to issue a best judgement assessment. Simply counting the transactions was not appropriate for Homsub’s business. Whilst the FTT accepted that all methodologies attracted an element of imprecision, in Homsub’s case, a customer may buy several items, some of which attracted VAT and some which did not.

In respect of the meal deals, Homsub argued that it was entitled to run its business as it saw fit, including selling stock at less than cost price. The FTT noted that the meal deal was not a true loss leader situation, rather, goods were packaged together to be sold at a single price; the apportionment of VAT was to be considered within the reality of the transaction. Whilst it was difficult to ascertain an apportionment, the FTT concluded that the costs of sandwich ingredients and labour was by far the largest cost component of the meal deal package.

The FTT applied the two-stage test formulated in Rahman v Customs & Excise Commissioners [1998] STC 826, and confirmed in Pegasus Birds Ltd v HMRC [2004] EWCA Civ 1015, to determine a fair overall percentage uplift:

  1. was the Assessment made according to the “best judgement” of HMRC, if not, it fails and stage (ii) does not arise;
  2. if the Assessment was made according to “best judgement”, should the amount of the assessment be reduced by reference to further evidence or argument available to the FTT.

The FTT concluded that as the methodology was flawed, the Assessment failed the best judgement test, and there was no need for it to consider stage (ii). However, the FTT noted that the calculations should be based on the values of the transactions rather than quantity. The FTT agreed with Homsub that the appropriate percentage uplift to take account of the meal deals was about 2% and that the exercise should look at results over a one month period rather than for a single day.

Whilst there would be variations between outlets, the FTT concluded that its methodology would take a best assessment of the proportion of the cost attributable to the food component of a cold food takeaway compared to the fizzy or hot drink component attracting VAT. It was indeed difficult to arrive at a fair and proper assessment of the cost price, including labour, of the cold food component, but any best judgement assessment in respect of the meal deal promotion would only apply to VAT periods after 1 January 2015.


This decision confirms the principles to be considered when evaluating a “best judgement” assessment issued pursuant to section 73(1), VATA. It provides helpful guidance on the types of methodology which HMRC should use to issue a best judgement assessment.

The decision also contains some interesting comments in relation to the VAT treatment of “meal deal” packages offered by retailers and how VAT on such packages should be apportioned.

A copy of the decision can be viewed here.