In our opinion an iceberg is a similar physical and emotional analogy to what those under tax enquiry can expect in terms of the obstacle to be manouvered ahead of them. Or more accurately what is in front and covertly below them… The real reasons for being selected for tax enquiry often lies under the surface. So a safe passage is only navigated with experience and then the business enterprise then can cruise into the future beyond its tax enquiry experience- lessons learned hopefully.
As hinted the inexperienced would never survive tackling the North Atlantic in mid to late winter. So why do taxpayers think they can survive given the Titanic odds against? Certainly there is no global warming today in terms of tax enquiries. The big freeze on legitimate tax avoidance and suspected evasion is on. The short – mid term forecast is that these tax enquiries are on the increase and the grip is tightening because of information tecnology gathering via benchmarking techniques. Tax enquiry is now, more than ever, an industry and profession all of its very own. That said, the benefits of information technology are not a one way street. Thanks to the new IT and these new specialist tax enquiry offices, (complete with pooling of individual tax experts specialist knowledge) the tide has turned HMRC’s way.. These specialist offices are both ensuring and shortening that the odds of a tax enquiry letter dropping through your letterbox any day soon. So you need to be prepared. If that’s not something of an understatement.
Okay, I’ve Got A Tax Enquiry What Do I Do?
After reading our “HMRC & Tax Enquiries” guide below decide if you need to call for a quote for advice.
Opening letters seem straight-forward but are basically full of double meaning for the unwary. Is it an Aspect or Full enquiry for example? The technically unqualified layman will soon or later come unstuck. Its as simple as that.
The exchange in dialogue with an Inspector, in the form of the opening letter notifying an enquiry, is just the friendly cannon fire for starters. Sometimes misleading too. A bit of a skirmish, which if tackled over zealously by either party, can all but scupper a business and eventually leave those found to be civilly liable- psychologically drained. Worse still your personal or corporate financial demise could soon follow. Not good news. A professionally measured technical response is required. So its important that you have on board a professional with all the necessary experience.
Read on to see what we mean. Sometimes pirates come incognito.
HMRC & TAX ENQUIRIES
Inland Revenue and Customs & Excise are now merged and known as HM Revenue & Customs. (HMRC).
Direct and indirect tax like VAT, enquiries, are stepping up and the government is putting more resources into this important area into HMRC’s operations. Self assessment has brought to the fore the ‘DIY’ concept of filing one’s own tax return. Many can competently complete the form, albeit, with a lot of time and patience, but often just come unstuck when an enquiry is officially notified. Unsurprisingly, many subjected to these enquiries do not have a clue what is going on, or even, what is expected of them. Ultimately this can only help The Treasury’s coffers. Breaches can also lead to discovery assessments, for ironically, the self-assessing taxpayers negligence or if you prefer genuine mistakes! With more tax interest and penalties, other than that of the original year of enquiry being raised, usually for anything up to the previous 6 years where there was no other similar enquiry.
Therefore, having someone in tow with you who will fight, fairly and squarely, any attempt by an Inspector to ‘break’ the information used to compile your tax return is probably a necessity. No matter what your concept of the Self Assessment regime is if you innocently complete a return negligently you will just suffer the penalty. Hopefully fair and just. The Revenue may say that they do try, but in not just our opinion, they very rarely give a fair and even handed account of what they think is the ‘right’ tax to pay. By one IR measure alone,tax enquiry is a very subjective exercise; The way enquiry staff are on defined targets to quantify in monetary terms their own performance at the job is also the subject of much controversy. Assessments are often or not based on personal knowledge, (or all available intelligence), of the taxpayers and what they have been trained to look for at in-house training ‘workshops’.When this ‘intelligence’ converges with entries on the SA Tax Return, (software benchmarking techniques), then more often than not you have yourself an income tax enquiry.
HMRC’s IR staff are trained in-house at Workshops. These are about the procedural aspects of collecting money from possible ‘tax avoidance’ and this often bears no relevance to the actual technical aspects of existing tax law. This is of course a very harmful situation for all the un represented taxpayers out there who assume that ‘paying the right tax’ and IR upholding the letter of the law in relation to what is actually going on, in their day to day business operations, is a given right in any given tax enquiry. Not so! And for a wide variety of reasons.As indicated above ignorance, envy and amoral attitudes for starters- on all sides! Senior Inland Revenue Staff are masters at knowing what makes people tick and you will need plenty of experience in handling the often sly ways in which they operate. In short the human condition has a big role to play in tax enquiries and as such there are often more questions than answers! Sometimes if only just because the enquiry is overloaded with personal pettiness.
Don’t believe it? The following are verifiable facts:
Common Examples of Recently Documented Tax Enquiries From Our Fact Finds:
Case 1 – Independent Taxation; Enquiries and Your Spouse.
Mr D has 2 self employed businesses as a Sch.DI taxpayer. Inland Revenue attempt to investigate his wife in year of enquiry who has no link with the businesses operations then or to date. Result: Inspector acknowledges that they can’t do this due to independent taxation of spouses and in practical terms as taxpayer was SINGLE! in year of enquiry! Why ask us then? A handbags at dawn scenario with Inspector and taxpayers girlfriend- now wife? Who knows!!?
Case 2 – Playing Inspectors Pet and Ignoring Professional Advice.
Mr S is approached behind his Agent’s back by an Inspector to attend a meeting, which he goes along with in the hope of gaining the Inspector’s sympathy. Result: Taxpayer, although initially encouraged by the Inspector’s ‘bedside manner, finds that the transcript of the meeting bears little resemblance to what was actually said and ends up paying much more tax. If they had kept to the professional advice given and stuck with the Agent’s agenda all this could have been avoided. He also incurs higher professional fees due to his breach of Agent’s professional terms of our engagement. Mr S doesn’t trust tax inspectors that much now funnily enough. As undermining professional protocol is not beyond some’s ethical behaviour.
Case 3 – Assumed Guilty Till Proven Innocent.
Miss C is frankly too mean to take professional advice. One of the main High Street banks gifts her £40k for some surreal reason about the cheque number being the same as Miss C’s bank a/c number. Buys flat in Canary Island with proceeds because the bank refuses to take the money back, allegedly. Spanish authorities refer purchase to UK’s IR as a normal matter of procedure. Inland Revenue enquire into the source of funds then start full enquiry into the business. 1 year later Miss C decides to get professional advice on the recommendation of both her Solicitor and the Inspector getting the runaround from her concerned. 6 years discovery assessments raised for ‘negligent’ completion of SA Tax Returns since 1997. Result: A little impartial professional advice led to the withdrawing of the discovery assessments for negligence on the part of a self assessing taxpayer by the Inspector.
Case 4 – Use of Home & Water Tank; Duality of Use.
Mr K claims use of home as business allowance. Inspector disallows it because the space used is in the loft next to the water tank. Therefore loft space is not wholly and exclusively used for business purposes due to the duality of personal use of the said water tank in the loft! Result: Inspector is advised it is no longer best practice to disallow use of home claims by the frankly silly criteria quoted. Basis of calculation amended and both client and Inspector are now all the wiser!
Case 5 – Inspectors’ Right To Meet Taxpayers
Mr B is represented by his Agent. The Inspector demands a meeting as a right. Result: Agent refuses meeting at this stage and asks for a written agenda of the points to be raised at the meeting instead. In the final analysis, it is pointed out on receipt of the ‘agenda points’, that 2 or 3 of these have no bearing on the submitted tax return and should be withdrawn. Inspector accepts this is the case and withdraws these agenda points.
Case 6 – Window of Enquiry; Valid, Aspect or Full?
Mr W receives an Enquiry Notice 14 months after submitting a tax return on time. Inspector relying on late filing extension of 15 months. Result: Appeal prepared as IR have relied on the wrong Legislation to begin a flawed enquiry. And on and on these examples go…………….!
So what to do if you receive formal notice of a tax enquiry? 1. The cliche’. Don’t panic! . 2. Ask yourself whether you have; a) An aspect or a full enquiry; b) The information requested; and c) The need for professional input. In our experience most only go for c) after a failed attempt at believing they would be better off representing themselves. Cooperate in full with the revenue and make payments to account promptly if you feel you are obviously culpable of not paying the right tax.
Case 7- Alleged Sharing of Expenses and Naming of Unconnected Parties to the Enquiry.
Mr S is accused of sharing phone and car expenses with his neighbour, Mr G. Mr G has just undergone enquiry and had closure on this. This was never mentioned in the course of the enquiry. Motor and Phone expenses restricted. On Appeal the tax office concerned expressed regret over the stance taken here and renegotiated a fairer settlement for the taxpayer.
Case 8 – Registration VAT Under ‘Future Prospects’ Legislation.
Routinely such registrations are successfully reversed. The Customs Shadow Economy Team are continually checking other businesses records for suspected VAT avoidance by anyone..corporate body or not.
So what to do if you receive formal notice of a tax enquiry?
1. The cliche’. Don’t panic! .
2. Ask yourself whether you have;
a) An aspect or a full enquiry; b) The information requested; and c) The need for professional input.
In our experience the unrepresented taxpayer only goes for c) after a failed attempt at believing they would be better off representing themselves. Remember:
Cooperate in full with the revenue and make payments to account promptly if you feel you are obviously culpable of not paying the right tax.
All information given in this section should not be taken as our advice applying to a particular situation that we have not first advised you upon. We therefore cannot accept any liability resulting on your reliance of this information, as fact, when it is applied to a tax, or accounting matter that we have not professionally advised you upon.