EM3576 - Recalculating Profits: Private Side - Means Tests: Method - Several Years

In practice, means tests are usually drawn up, year by year, over an extended period. There are no set rules about how many years should be included. You could for example prepare a means test for each of the years for which you intend to seek additional profits.

If the earlier years are already under enquiry, or you can open an enquiry under Section 9A TMA 1970 because the ‘window’ for doing so has not passed, there is no problem in obtaining information. You should be able to demonstrate that you need to recompute the profits by reference to the private side because you consider that the records upon which the return or accounts are based are inadequate.

If an enquiry has been closed for the earlier years or the time for making one has passed and the taxpayer will not cooperate with you to provide the information you need, then you can only formally obtain the information by

• making a discovery assessment under Section 29 TMA 1970 EM3251
• using the information powers in FA08/Sch36.

You need to tell the taxpayer the reason for the enquiries into earlier years and give them the Code of Practice (COP11) EM1552, or refer to it if sent previously.

A means test covering several years works along the same lines as a single year EM3575. Capital worth is calculated at the beginning and end of the period. The example looks at a 5 year period.

		£
Building Society opening balance at year 1	3000
Building Society closing balance at year 5	13000
(Based on interest received)
Increase		(10000)
Declared income from all sources	60000
Less tax, NIC and mortgage	(20000)
		40000
Balance available over five years		30000

This averages out at £6000 each year.

Although this may be useful for a very quick check against other information, the more years that are included the greater the chance that the average annual figure covers distortions in individual years.

But if the above figures break down as follows:

	Year 1	Year 2	Year 3	Year 4	Year 5	Total
Opening capital	3000	4000	7000	8000	11500
Closing capital	4000	7000	8000	11500	13000
Yearly increase (A)	1000	3000	1000	3500	1500	10000
Declared income	11000	11500	10500	12000	15000	60000
Expenses	2000	3500	3500	5000	6000	20000
Net Income (B)	9000	8000	7000	7000	9000	40000
Available for living (B – A)	8000	5000	6000	3500	7500	30000

Then it is obvious that something may well be wrong. Money available in year 5 is slightly less than in year 1, without taking inflation into account. Year 4 looks very much on the low side.