HMRC Methodology Challenge
HMRC frequently relies on forensic reconstructions to estimate undeclared income in direct tax investigations. A tax expert witness challenges whether the correct methodology was applied and whether the figures are supportable against HMRC's own published guidance.
Common failures include applying industry mark-ups without regard to the specific business model, lifestyle analysis using incomplete data, and ignoring HMRC's approved reconstruction methods. In one case, independent review reduced alleged undeclared income from £600,000 to £100,000.
Methodology challenge is equally important in COP8 and COP9 investigations before settlement, and in FTT proceedings where HMRC's reconstruction forms the basis of the assessment.
| Aspect | Detail |
|---|---|
| Reconstruction review | Analysis of mark-up, lifestyle, and cash flow reconstruction methods |
| HMRC compliance | Assessment against HMRC's published approved methodology |
| Data validation | Testing underlying assumptions and source data reliability |
| Counter-quantum | Independent calculation of correct tax position |
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