EM3572 - Recalculating profits: private side - means tests: limitations
A means test is a way of determining the amount of money that is available to a taxpayer for living expenses.
The advantage of the means test is that it can be compiled quickly using limited information.
They key features of a means test are that it
- is simple to compute
- covers a defined period of time
- takes into account known incomings and outgoings
- shows the balance available to meet other unspecified expenditure
The basic formula is
Less Known Outgoings
Equals Balance Available
Although a means test is a useful tool it does however have certain disadvantages. It can only be as accurate as the figures on which it is based. The more assumptions you make the less reliance can be placed upon it. Nevertheless, it may reinforce your view of the need to make enquiries.
Particular difficulties may arise because:
- You may not know all incomings and outgoings when preparing the means test
- Accurate figures may not be available for all incomings and outgoings
- The dates of the information you are using from the returns and the accounts may not coincide. The larger the number of months variation, the greater the unreliability.
- You will arrive at a figure which represents the amount available for general, unspecified living expenses. This figure may appear adequate, because you know little about the taxpayer’s likely life-style.
- The information you hold is very limited. You will not know about balances on current accounts, holdings of National Savings Certificates or premium bonds, or purchases of antiques, furniture, expensive holidays etc.
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
- The information you hold about the taxpayer’s spouse, civil partner or domestic partner is likely to be limited or even non-existent at this stage. However, the passing of funds and assets between the two could have a marked effect on the results of any means test.
- A declared figure of interest might not represent the closing balance on the account if there have been large fluctuations during the year. Moreover, when calculating the capital, there is now a multiplicity of interest rates available to savers. Although using the wrong interest rate could over or understate the amount of capital, it will have a much lesser effect on capital increases if used consistently.
- Items included in the returns or the accounts must be remembered - both deposit accounts which might also feature in the personal returns and private use adjustments. Movements on the former should not feature in the means test, while the latter will augment the amount available.