HMRC will of course request information from the taxpayer when enquiring into a tax return (see A6.405 and A6.409). However sometimes that information may be incomplete. Even if it is complete, HMRC may seek to check the validity of reported figures using mathematical extrapolation methods based on known norms and patterns.
Extrapolating trading profits through the use of business models
Business models apply formulae to figures in accounts or other records to arrive at estimated figures for turnover and expenses. Analysis of the standard accounts information can often identify significant relationships between certain figures from which HMRC can test the credibility of filed figures1.
Business models have traditionally played a significant role in HMRC's enquiry work, not only in selecting cases for enquiry, but also in forming the basis of a reconstruction of business or company profits which is then used to displace the accounts, giving rise to additional tax, plus interest and penalties. The use of such a model to estimate the profits of a taxi driver based on a 'fuel to takings' ratio was approved by the High Court in Coy2.
A business model does not prove conclusively what the profits of a business were, but where it is shown that the records cannot be relied upon, eg where the business records are incomplete, the officer may seek to use a calculation based on a business model. While a business model does not claim to give a precise