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HMRC internal manual

Enquiry Manual

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HM Revenue & Customs
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Recalculating Profits: Business Models: Comparison with Private Side

When your exercise is complete, as well as seeing whether it makes commercial sense you must consider whether it fits with what is known of the taxpayer’s private life style. However, it is very difficult to be certain what any individual spends. There is, broadly, a minimum level which we all need to feed and clothe ourselves. Beyond that, it is possible to spend thousands of pounds on home improvements and furnishings, holidays, entertainment, hobbies, travel. Much of this will not show up on a statement of assets even if that is correct and complete.

The taxpayer may tell you that they spend little on recreation, entertainment and business but you will have to consider any such statement critically. At the end of the day, you can only make a judgment whether, on the balance of probabilities, it is likely that the taxpayer has had the use of the profits indicated by the business model.

This is not to say that you need to undertake anything like a full private side review EM3550. However, the figures which you are putting forward from your business model must be credible. The onus of proof in overturning HMRC amendments or assessments rests with the taxpayer, but that does not mean that you may make amendments or assessments in whatever figures you like. They must be best judgements in all the circumstances EM3705.

If they are not you risk losing the case before the tribunal or receiving a justified complaint.