TaxPersonal TaxSummer 2003 Top Tip

Summer 2003 Top Tip

This quarter's tip:Countering the use of business economics models to establish undisclosed business takings.

Summary

The Inland Revenue, particularly at district level, frequently uses business economics models to justify additions to business profits. These models are often fundamentally flawed, and even when not can be defended, especially where there is little other evidence to suggest fraud.

A business economics model is precisely that, a “model”. It is theoretical, not practical. If faced with Inland Revenue arguments based upon such calculations, be sure to check the assumptions upon which they are based. They often have major flaws. In a real investigation case, the Inspector calculated profit uplifts of more than £100,000 per annum for a restaurant and take-away business, based upon foil containers purchased. Even if open 24 hours per day, 365 days per year, the business could not generate that level of income. A tour of the premises, showing the Inspector the storeroom, still full of foil containers, was evidence enough to refute the figures.

There is hope, too, even where the assumptions made are realistic. Case law is available to support claims that business economic models alone are not sufficient to justify amendments to profits. They need to be supported by evidence that, for instance:

  • the business records are clearly inadequate and /or incomplete, and
  • there are unaccounted for private bankings or increases in wealth.

A look at Scott and another (trading as Farthings Steak House) v McDonald (Inspector of Taxes) [1996] STC (SCD) 381 might help!

For expert advice, free of charge, on countering business economics model calculations, or other tax investigation issues, click here.

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