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HMRC internal manual

Enquiry Manual

Recalculating Profits: Private Side - Capital Statements: Basis of Computation

The capital statement is prepared on the basis that a person’s

  • personal and private expenditure added to
  • any increase in total wealth during the period (or less any decrease in total worth).
  • must equal total income during that period.

If personal and private expenditure taken with the movement in assets results in a sum greater than total income, the deficiency is assumed to be business profits omitted from the accounts and used by the proprietor or directors in the absence of any satisfactory explanations.

You will include all the taxpayer’s assets and liabilities at particular dates, usually annual rests. These will include assets held abroad or on his or her behalf by any other person.

Typical items you should include are

  • the balances on all bank accounts, savings accounts, building society accounts (including TESSAs, ISAs) etc.
  • cash in hand and in safe deposits
  • the full amount of any loans made by the taxpayer and still outstanding, regardless of whether or not any part is felt to be irrecoverable
  • the cost price of any property or investments, such as stocks and shares, savings certificates, premium bonds, single premium life policies etc. including all legal, brokerage and other costs of purchase
  • the cost price of personal possessions, such as jewellery, furniture, motor car, antiques, collections of coins or stamps etc.

From this total should be deducted amounts owing on loans, mortgages or bank overdraft and any credit or charge card liabilities.

Usually, you need only include personal possessions if they were acquired during the period covered by the capital statements. The opening balance would then be nil. You will have to ensure that you do not deduct the cost of any item which was bought before the enquiry period but sold during the enquiry period.

Details of contents and `all risks’ insurance policies will help verify what you are told about physical assets. If a balance sheet has not been supplied, business assets and liabilities will have to be included in the capital computation.