Recalculating Profits: Private Side - Capital Statements: Uses
Full capital statements involve a detailed accumulation of information about capital worth, income of all sorts and expenditure. They are usually prepared at annual rests and cover a number of years. Preparation of them is an expensive process for both HMRC and taxpayer.
Even if information is collected meticulously about assets and income, the accuracy or otherwise of the figure for personal and private expenditure EM3650+ can still render the exercise ineffective.
The capital statement may show that the taxpayer has apparently spent more than he or she has had in income, but that does not prove the deficiency was funded out of omitted business profits. If there is no likely alternative source of income, then it is a reasonable inference that business profits have been understated. However, this inference will be strengthened if you can show that the business accounts are unreliable. You will also have to consider any explanations put forward by the taxpayer and examine these critically.
Capital statements remain a well tried tool of enquiry work. They have been accepted by the Court of Appeal as a perfectly reasonable method of measuring a taxpayer’s true income in the absence of a more reliable alternative EM3705. You should consider them in a complex case in which there has been a great deal of movement between bank accounts or buying and selling of assets, or where you believe that there are substantial omissions from accounts and the use of a business model to recompute business profits is not appropriate. In a smaller or more straightforward case it may well be possible to establish a broadly based settlement having calculated private expenditure in the year of enquiry, the overall movement in assets over the period to be covered by the settlement and the effect of any exceptional items.