EM2022 - Working the enquiry: reviewing earlier years: private use adjustments - examples

Reviewing would be appropriate where

  • it had been stated in past years’ correspondence that there was no own consumption but a meeting with the taxpayer has revealed that there is in fact a considerable amount
  • there has been no discussion of a private use proportion but on examination it is found to be grossly understated, say 75 per cent when only 10 per cent had been applied
  • an asset has been incorrectly described so that the potential for private use is not obvious, such as the `water storage tank’ that turns out to be a swimming pool
  • there has been a significant change in the underlying facts which has neither resulted in amendment of the present private proportions, nor drawn to HMRC’s attention such as a change in goods sold so that more are taken for own use, the purchase of a vehicle which is not suitable for business use, or a large extension to a house which renders the business proportion much smaller.

If an agreed basis has not been adhered to, there is the problem that returns have been accepted without enquiry, and possibly appeals determined in earlier years. For instance, private use may have been agreed as a percentage of sales, but the original figure has been carried forward to future years without amendment. In these circumstances much will depend upon the size of the resultant error, and whether there are other adjustments. The profits returned have not accorded with the facts, and if the difference is large and obvious it could be argued that the understatement should have been spotted by the taxpayer. Generally, if the difference is significant, it will be sufficient to amend in date years as far as appropriate, unless you feel that the error was deliberate.

Agents and taxpayers sometimes claim that adjustments to private proportions are not culpable. If the adjustment is such as to be obvious, then the taxpayer should have noticed it, and has been neglectful (or, for appropriate periods, has acted carelessly or deliberately, see CH80000+). The adjustment can be obvious in one of two ways, either because of its amount, so that it is materially understated, or because it is clearly factually incorrect.

An example of the latter would be where say a trader owned four cars, two of which were used solely by his or her children, but the computational adjustment to expenses and capital allowances was a uniform 20 per cent private use for each car.