EM2011 - Working the enquiry: reviewing earlier years: working methods

When it becomes clear that you will have to reopen earlier years, you will have to decide how to quantify the additional liability for those years. Whatever method you decide to use, you will have to obtain the agreement of the taxpayer and agent, or face an eventual tribunal hearing. You may decide to divide the work with the agent. If so you should agree a timetable and ensure at regular intervals that it is being adhered to.

Your enquiries to date will have produced

  • the certainty or strong probability of understatements or omissions from accounts or returns
  • information about assets
  • understanding of the business and its records, and
  • a broad knowledge of personal spending and the financing of private assets.

From this information, and guided by the way in which the omissions in the current year were demonstrated, you should decide how to approach earlier years. There are no hard and fast rules about working methods, whether or not penalties are likely to be involved. You may be able to scale back the adjustment for the year under enquiry. It is unlikely that sufficient information will be available to compute business models for earlier years, and so if a detailed investigation is required it will probably have to be through capital statements. In terms of evidential value, neither method has an inherent advantage. If the omissions relate to a discrete source, it may be possible to verify amounts for earlier years from the payer.