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HMRC internal manual

Enquiry Manual

Recalculating Profits: Private Side: Capital Statements: Evaluation

When you do not have exact figures, you should ensure that estimates are reasonable - neither inflated nor undervalued. Look at the statements as a whole once they are complete and ask if they make sense presenting a reasonable and impartial summary of the taxpayer’s affairs, which you would feel confident in putting to the tribunal?

If the statements show that income was inadequate to fund living expenses and savings, you will normally argue that the deficiency represents omitted profits. You should also look at what the results mean for the business

  • What is the effect of adding back the amounts as business profits?
  • Is the turnover realistic?
  • Could the proprietor or director realistically have had access to such sums of money?
  • What does the introduction of the amount do to the business ratios?

If you can show that the addition makes commercial sense this reinforces the case for adding back this amount as additional profits from the business.

Where the capital statements produce fluctuating results, either different levels of deficiency or surpluses and deficiencies, you will need to consider the results carefully.

  • Are there any explanations for the fluctuations?
  • Has anything been overlooked?
  • Which results seem to make more sense when related back to the business?

You should be extremely reluctant to `spread’ the results, evening out a pattern of surpluses and deficiencies. If the information you have been given is accurate you would expect to see the statements all showing results which balance approximately. If you have taken actual totals at the `rest’ date rather than bringing together a variety of year ends, you will want to probe the reasons for the fluctuations. Especially for periods of surplus there can be a variety of explanations, such as-

  • concealment of assets
  • unusually high personal expenditure which has not been revealed
  • understatement of normal expenditure, which may turn the surplus into a deficiency, but would retain the fluctuations
  • accumulation of cash at the year end which was banked or invested in the following period.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)