Business Economic Models (BEM) is sometimes used by HM Revenue & Customs (HMRC)Inspectors when there is an absence of records. 

Say for example you have a public house which is under enquiry, and again for the sake of this article say the till roles are missing for the year under review.  Technically the revenue can argue that the records maintained are weak and can not be relied upon.  It would be common for HMRC to use business economic models to test the accuracy of the reported sales figure.  As an example they would gather information from the purchases and see how many units for each item were purchased.  They would ask for a price list for the time of the enquiry and once taking wastage and private consumption into account would assess whether the sales figure was realistic given the items purchased in the year. 

On face value this seems a reasonable way of testing the accuracy of a sales figure, when there is the absence of strong prime records, such as the aforementioned till rolls.

Don’t accept a BEM in the first place.

With that said BEM’s can produce very unrealistic results.  TCS Investigations Limited has had to defend many cases where BEM’s are the preferred method of the inspector in testing the accuracy of the reported sales figure.  In the first instance you should try and prevent the Inspector using a BEM to settle an enquiry. Do your upmost to put forward the argument that the records are not weak and can be relied upon.  Obviously this depends on the facts of the case, but the first defense against the results of the BEM is not for it is used in the first place.

Should the first tactic fail, then discredit the BEM as much as you can, should the case proceed to commissioners then any comments made previously in discrediting the accuracy of the BEM can be useful. The revenue will always try to build a case discrediting the accuracy of the accounts and the credibility of the client; this must be defended at every turn with counter arguments discrediting the accuracy of the BEM.

Common Sense

For example always check the BEM carefully down to the last detail, in variably they are prepared in hast and are rarely accurate.  You should always challenge estimates used in a BEM such as wastage and Gross profit margins.  Always look at previous year’s accounts, stock take records, look at the length of the lines in the pub, how often are the lines cleaned, how much beer is actually being wasted each time and therefore can’t be sold. Does the cellar flood, did the temperature control fail during the year, have returns been taken into account, how many tables are being laid for meals, how many waitress are working? Is HMRC suggesting that the restaurant was 2/3rds full every night, but the wages records show insufficient staffing levels to consistently cope with that amount of customers. 

A lot of this is common sense and can be applied to different business; it’s just a case of thinking outside the obvious indicators.

Meetings

It would be our advice that the client should never give information in a revenue meeting which could be used later for a BEM.  Such as wastage, Gross profit margins, etc etc.  Invariably any information given will be from memory, and memory under the pressure of a meeting can not be relied upon. If you do nothing you will find that the information given in innocence turns up again in a BEM.

It’s very difficult to defend a position when the information being used in preparation of the BEM was supplied by the client.  If the client or the agent feels that providing the information something they wish to do, then it should always contain a caveat.  

The agent should always say that the information provided by the client is from memory (should that be the case) and anything that is to be replied upon requires further review/verification.  The agent should always ask for these comments to be included in the notes (without fail) regardless of how confident the client is regarding the accuracy of the information being provided in a meeting situation. 

Notes

In some cases the Inspector will nod and say that they will include the statement in the notes.  Always check that is the case, if it is not included do not sign the notes, return them and ask them to be retyped.

I will never approve any notes with such an important statement being manually adjusted.  In fact I do not return notes full stop, as they have a nasty habit of coming back to haunt you.  Should that be the case, the fact the notes were never agreed can be useful if you need to redevelop your stance.  The fact that I choose to never return notes is a personal choice, judgment should always be used given the facts of the case.

The above is just some principles of how to defend your client against a BEM.  I would be more than happy to advise you or your client when faced with a Business Economic Model.  If you feel that I could be of assistance then please do not hesitate to contact me. mail@tcsinvestigations.co.uk

The above is the opinion if the enquiry director Mark Witt and not necessarily the opinions of TCS Investigations Limited.  The company or the author takes no responsibility in respect of actions taken, or not taken based on the views expressed above. Please see our disclaimer for further information.