Focussed on your success

Business Economic Models & Force Majeure

Resisting HMRC's use of a Business Economic Model

On occasion during an enquiry into a tax return, HM Revenue & Customs (HMRC) may wish to test the accounts included in a taxpayer’s return by using a Business Economic Model (BEM). This is a fairly straightforward exercise, in which they test the accuracy of sales by modelling what the expected income should have been based on available business records. In this study, I will base the example on the operation of a fish and chip shop.


BEMs should always be resisted, as experience teaches us that the result will invariably be against you.  The trick is to always defend the numbers in the original accounts and the strength of the original accounts’ preparation.  However, if for any reason the records which were used to prepare the original accounts are no longer available for HMRC inspection, then you are effectively inviting HMRC to ignore the original accounts and pursue their own sales figure via a BEM.  If you do not give HMRC a reason to produce the model, then the results cannot be used against you.

In our example let’s say the till rolls are missing, and consequently HMRC are able to argue that the sales in the accounts are weak due to the absence of the original records for them to inspect and compare to the accounts.


In the circumstances of incomplete records, HMRC will try and base the starting point of their model on what they consider to be indisputable evidence.  Say, for example, in a business where an item is made from materials, they will perhaps use purchase invoices to ascertain how much of a material was purchased (X).  They will then use this information to ascertain that if X amount of a material was purchased then that would make Y number of the item for sale.  Y multiplied by the sale price will then ascertain what the sales should be (once adjusted for closing stock).

In respect of our fish and chip ship, say that on average 20 sacks of potatoes were purchased a month, HMRC can then calculate how many portions of chips would have been available to sell.

This is where utmost care is required, It is very important that you do not showboat during the course of a meeting with HMRC.  Throwaway remarks or observations made in course of a meeting may be recorded and then can be used in the model.  If you exaggerate or guess the answer to any question in a meeting, you could find yourself paying tax based on a model which is not realistic. 


There are many defences against the results of a business economic model.  However, the first angle to review when formulating a defence against the results of a BEM is Force Majeure.

Force Majeure is Latin for “superior force” and can be an incredibly useful defence in dealing business economic models.  Force Majeure can be anything which has caused an unusual result, such a chance event or accident.  Force Majeure is also known as an act of god, which in terms of Mother Nature is incredibly useful.

For example, say our chip shop was situated in the middle of an area in which there was a riot.  This would affect business during the riots and for some time after. Alternatively, the trading premises may have suffered a small fire or flooding, or it may be as obscure as significant road works in the proximity of the shop. All these examples would be Force Majeure and beyond the trader’s control, therefore, affecting the profits that HMRC wish to test using the model.

The defence of Force Majeure involves discrediting the results of the HMRC model to show that it does not take into account specific events which affected the business during the accounting period.  If you can demonstrate that the model does not take into account specific events then HMRC will find it difficult to use the results of the BEM to justify adjustments.

Earlier I said that HMRC normally want to base the BEM on an undisputable set of facts, such as purchase invoices.  However, you need to remember that purchases do not always mean the resulting product was sold.  In our case, we have chips. Chips can go cold and suffer significant amount of wastage.  Just because raw material comes in, does not mean it was sold.  Therefore Force Majeure should always be examined to see if it can impact on the BEM

There are many other defences to use when faced with adjustments from a BEM.  However, Force Majeure and its relevance in the accounting period should be one of the first areas of review.

Find out how we can help
you and your money
Get in touch