Investigation Matters

Settlement

If it is accepted that the business economics exercise and/or the means test has demonstrated that income has been omitted from the business records, the level of omissions in the investigation year/period will normally be used to determine how many years to reopen and provide the basis for estimating omissions for the earlier years which are reopened.

To determine how many years should be reopened:

• if the omitted income in the investigation year/period is less that £1,000 the inspector will accept an uplift to the profits for that year only, with no additions for interest and penalties
• if the omissions are between £1,000 and £2,000, the inspector will accept an uplift to profits for the six years in date but still without any addition for interest and penalties
• if the omissions exceed £2,000 the inspector will seek to reopen all years and charge interest and penalties.

If the level of omissions has been established by way of the business economics exercise, when estimating the omissions for earlier years the inspector will generally seek to apply the Retail Price Index to the established omissions and relate them back to the earlier years. If this method is adopted, it should be remembered that the scope for diverting income in earlier years might have been reduced due to:

• a less buoyant market in the hairdressing trade sector (see Sector overview : Turnover trends)
• failure or inability to maximise sales (see Nature of the trade: Factors affecting sales)
• poor business practices (see Performance indicators : Factors affecting ratios)
• special events such as closure due to illness, a competitor opening, etc
• inexperience, particularly in the early years

If the omissions have been established by way of the means test, when relating them back to earlier years with the Retail Price Index, the estimates for the earlier years should reflect any

• variation in the size of the household
• increased commitments
• reduced standard of living

When calculating the penalty the inspector will mitigate the full penalty by up to:

• 20% (exceptionally 30%) for disclosure, plus
• 40% for co-operation, plus
• 40% for size and gravity