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HMRC internal manual

Enquiry Manual

HM Revenue & Customs
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Recalculating Profits: Private Side - Capital Statements: Examples

Below are two examples of how to build up a capital statement.

The first example assumes no business accounts have been provided. The enquiry officer has reconstructed the business capital on the same lines as the private capital. A newly appointed accountant arranged for stock to be taken and figures of debtors, creditors and cash to be established as at 31 March 2001.

In the second example the enquiry officer has taken the business capital from balance sheets prepared by the accountant.

Both examples are based on the following facts:

  1. The taxpayer commenced in business on 1 April 1995.
  2. One of the risk factors in selecting the 2000/01 Return for enquiry was that the enquiry officer discovered that a sum of £25,000 had been invested by the taxpayer in a local private company.
  3. The taxpayer’s Returns showed no investment income. His wife’s Returns showed only properties inherited from her parents in 1997-98.
  4. There was satisfactory evidence that £42,000 (in a bank account and other investments) was owned at 31 March 1995. The whole of this money, plus a further £89,000 borrowed on mortgage secured on the business premises, provided the capital for setting up the business and acquiring the premises, fixtures, van, stock etc.
  5. The taxpayer claimed that a further £10,000 or so had been held in cash at 31 March 1995, and that this money had been subsequently invested; he could provide no proof of this and, after detailed discussion, he withdrew the claim.
  6. The enquiry officer’s enquiry about the £25,000 invested in the local private company brought to light a private bank account which contained entries relating to the purchases and sale of shares. The income from these was not, however, credited in the account and a further enquiry on this point revealed that it had been paid into a building society account. Further examination of the account disclosed transfers to and from a deposit account. It also brought to light another current account in the name of the taxpayer’s wife.
  7. The wife’s current account showed a credit which was admitted to be from a building society account in her name; it also revealed the purchase of a private car.
  8. The existence of the Government Securities and Premium Bonds held by the taxpayer came to light as the result of further enquiries made by the enquiry officer.
  9. The accountant, at the enquiry officer’s request, analysed the debits in the various bank etc accounts to show
  • Payments of Income Tax
  • Life assurance premiums
  • Business capital expenditure charged:

    • to business current account; and
    • to private current account.
  • Personal and private expenditure drawn by cheque on both the business and private bank accounts.
  • The analyses also showed a gift of £6,000 to the taxpayer’s son in 1999-2000.

10.  Documentary evidence was furnished of the matured life assurance policy and of the legacies received.

Example 1: No Accounts Provided

Example 2: Accounts Provided For Each Year


  • Capital allowances to be computed.
  • The cash element in private expenditure was agreed after discussion with the taxpayer.
  • In Example 2 the cash drawings included in the accounts represents a balancing figure.
  • In practice the actual figures for stock, debtors, creditors etc in Example 2 would be different from the estimates used in Example 1. So that the examples can be compared more easily, the same figures have been used throughout.