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HMRC internal manual

Enquiry Manual

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.