Working the enquiry: reviewing earlier years: combination of methods
A business model can raise declared profits dramatically where they have been found to be understated. You should consider the effect of the proposed revisions on personal drawings and expenditure. Does the result seem at all realistic - is the taxpayer likely to have spent such sums of money? This is of course a question which is very difficult to answer. Some people are not what they seem as auditors and Enquiry Officers discover from time to time, but most are. You should not be trying to impose unbelievable figures - it is unfair on the taxpayer, and you may well find that tribunal is not convinced that the money was spent. When faced with such very large additions you should consider the private side and the accuracy of the business model. Only if you remain convinced in your case should you continue.
Whichever method you have used to calculate additions you should consider using the other as a broad check. Thus, if the turnover is recomputed from first principles you should review the revised drawings to satisfy yourself that they are consistent with the broad pattern of the taxpayer’s personal and private expenditure and savings. You might also scrutinize the business and private bank accounts for evidence of diverted takings, or in material cases, you might make other independent enquiries under FA08/SCH36, see CH23600+.
Similarly where the revised income is computed from a capital statement, the result should be incorporated in the accounts to produce a revised figure of turnover. How realistic is it? If you are satisfied, it will give you a guide as to what to expect from future accounts.