HM Revenue & Customs Enquiries And Investigations

What self assessment does is pass the onus of assessing tax from HM Revenue & Customs to the individual taxpayer - what it does not do is cut out the need for expert taxation advice in the completion of the forms and in dealing with the minefield of payment dates, filing dates, interest, surcharges and monetary penalties.

Now that self assessment has become well established the problem areas and the incidence of additional interest charges etc. can be seen and it is clear that for those coming into the Self-Assessment net, there is an increasing need for professional advice.

When are cases selected for Enquiry?

Tax Inspectors are now busy sifting through the last year’s tax returns and are selecting cases for 'Enquiry' (previously known as Investigations). They are in no rush as they have a twelve month period in which to check out the details returned and decide whether to mount an enquiry. So, no one can be certain until after a year from the filing deadline that their tax return for a particular year has been finally accepted without query. Even that certainty is being eroded as HM Revenue & Customs seek to extend their reach using “discovery” provisions. Indeed it now seems that they are seeking to stretch the legal limit on these provisions.

Returns for year ended

Filing deadline

Tax Enquiry deadline

5th April 2011

31st January 2012

31st January 2013

5th April 2012

31st January 2013

31st January 2014.

How are cases selected for Enquiry?

Actually, it may not be a real person that is sifting through the returns to select cases for enquiry. It may more likely be the computer! Since self-assessment was introduced in 1997 the forma in which information is supplied has been prescribed by HM Revenue & Customs. Thus it is easy for them or their computer to compare figures form year to year and even from one trader to others with the same trade either in the same area or nationally. They can routinely calculate average figures, ratios and percentages for any given trade and again either for a specific area, region or nationally.

Self assessment brought with it the power of random audit of tax returns. Around 10% of enquiry cases selected are believed to be entirely at random. There is no evidence that Inspectors adapt their tactics, which can be very stressful and intimidating for individuals, in order to handle sensitively cases where the taxpayer has the presumption of total innocence and there is no real reason why he should be investigated. Having said that the culture of suspicion is so strong within HM Revenue & Customs that we must accept they thing everyone is guilty in some measure!

HM Revenue & Customs naturally do not disclose full details of their selection process but it is widely accepted that there are a number of things that can trigger a case being selected. These include but are by no means limited to:

  • A fall in Gross Profit for an established norm for that particular business

  • Other changes in calculated business ratios.

  • A variance in the gross profit percentage from the established norm for a given trade.

  • Capital Introduced appearing when there are no savings (or income from them disclosed in past years) from which such money might originate. HM Revenue & Customs are always suspicious that Capital Introduced is in reality mis-described takings.

  • Insufficient drawings for the trader to be able to live on.

  • Insufficient drawings in relation to the trader’s lifestyle.

  • No cash balances in a cash trade.

  • High levels of a particular type of expenditure, especially

    • Repairs

    • Advertising, promotion and Entertainment.

    • Legal and Professional Costs

  • Unchanging round sums in the accounts year after year (eg stock on hand on the Balance Sheet or a particular expense)

  • Information Received either from a tip off or from others. A wide range of third party information is available to HM Revenue & Customs including:

  • Aircraft and Boat Registers

  • Auctioneers returns

  • Chargeable events

  • Commission & Consultancy Fees

  • Double Tax Investment Income Returns

  • Entertainers

  • Franchise deals

  • Land and property transactions

  • Licences and Royalties

  • Literary Returns and copyright information.

  • Rents handles by local Property Agents

  • Payments by BUPAS and other medical Insurers

  • Pensions and Benefit Payments

  • Private Dwelling Value

  • Property Abroad

  • Payments by government departments for Services/Commissions.

  • Sporting

  • Stockbroker returns.

Many of those selected for enquiry assume that they are being looked at because someone has been telling tales about them. However, whilst such information is considered it is not always detailed enough to be the sole cause of an enquiry. However, anyone going through a messy divorce or having to dismiss an angry employee should consider whether there is anything that any aggrieved party might wish to pass on to HM Revenue & Customs!

HM Revenue & Customs Initiatives

HM Revenue & Customs have attempted various different approaches, always with the stated aim or making enquiries quicker and more efficient.

One of these started from the 1st April 1998, and was called 'Faster Working'. Their aim was to open up and maintain a channel of communication between themselves and accountants by agreeing in advance a strict timetable for the procedures involved in the enquiry. This they thought would enable them to move much more swiftly towards the end result of a monetary settlement within around twenty four weeks. Whilst participation in 'Faster Working' was voluntary on the part of the taxpayer, it was clear that local offices were likely to pursue these methods vigorously. As predicted by us they eventually they realised the implications and difficulty of adhering to deadlines just like they expect clients and their accountants to do and so this was another initiative that fell by the wayside.

A more recent initiative is the “Disclosure Opportunities”. These work like this.

  1. HM Revenue & Customs announce a disclosure opportunity for a specific group of taxpayers. Groups so far have included:

    1. People with money in Lichtenstein banks

    2. Doctors & Dentists

    3. Plumbers,

    4. Electricians,

    5. Personal Tutors and trainers

    6. E-market sellers.

    7. Individuals who have been sent a tax return or told they are required to submit one but have failed to do so. It is available to those paying higher or additional rate taxed for 2009/10. This ended on 2nd October 2012.

  2. HM Revenue & Customs “widely publicise” the Disclosure Opportunity, which always has a closing date. It is then open to people in that group either directly or via their accountant to come forward and disclose whatever they have done wrong. This may be

    1. not registering at all for tax and NI,

    2. understating income or

    3. overstating expenses.

  3. When a full disclosure is made the taxpayer is required to pay the back tax and NI but can be excused from any Penalties that would otherwise be due.

  4. After the deadline has passed, anyone who really ought to have taken advantage of the Disclosure Opportunity can expect two things

  5. An investigation! HM Revenue & Customs do their homework and may be ready to pounce the moment the Disclosure Opportunity ends

  6. Not to be treated at all leniently. Failing to take advantage of the opportunity is seen by the taxman as an indication of a trader being a bad lot and not deserving of any sympathy!

At the time of writing (you need to check on end dates by visiting HM Revenue & Customs website) the following initiatives have started or are about to start.

  • Direct Selling Agents, (eg Avon, Betterware etc)

  • Home Maintenance and Improvement. This sweep up follows on from the Plumbers, Electricians opportunities which have ended and will be aimed at a variety of skilled trades such as roofing, window fitting, carpentry, bricklaying and joinery.

How does an enquiry usually progress?

The usual stages are:

  1. Selection of the case.

  2. Issue of an enquiry letter or information notice which for all but the most straightforward of cases will nowadays include a request for a visit to the business premises.

  3. Review of the available information by HM Revenue & Customs.

  4. Interview with the taxpayer (and his/her accountant).

  5. Further action to clarify points arising from the interview, including evidence being obtained by the taxpayer or his/her accountant to support contentions.

  6. Re-computation of profits

  7. Agreement of deficiencies, additional tax, NI and interest due and negotiation of penalties

Interview & Questions

We do not recommend that taxpayers

  1. Panic!

  2. Attempt to deal with such enquiries themselves

  3. Answer questions direct to HM Revenue & Customs over the telephone

  4. Guess the answer to questions instead of admitting they don’t know.

  5. Give an imprecise answer.

  6. Construct a false document to support your case. This will get you into very deep hot water!

Sadly, we believe that the days when the honesty and reliability of every single taxman could be taken for granted have passed. Some, perhaps many, are honest and diligent but how do you know that includes the one you are speaking to, off the cuff over the telephone? How do you know he/she is accurately recording what you say or that what you say is what you actually meant to say?

Beware of tricks! We have experience of the taxman (or woman) asking for details of a taxpayers personal expenditure. The taxpayer giving details (including estimates) of current expenditure and then the taxwoman subsequently swearing black is white that she had asked about expenditure some years ago (when the price of everything was less) and using that as the basis of a calculation how much cash income the taxpayer needed (back then) to live and increasing the profit to be taxed accordingly.

We will endeavour to ensure questions and answers are clear what and when they relate to. Better to avoid confusion in the first place than have to try to correct it afterwards.

Before the meeting

Before HM Revenue & Customs begin an investigation they will look at information in your returns, accounts and statements, and from other sources. They may also contact other people or organisations before we contact you or us as your professional adviser.

You should ensure you read the Code of Practice (should be supplied by HMRC) in full before the meeting.

If you decide to co-operate with HMRC, and although you are under no obligation to do so not doing so will increase any eventual penalties, they regard attendance at meetings as an important part of that co-operation. Meetings give them both a chance to ask questions and clarify points as the investigation progresses.

Naturally we meet with clients well before the meeting to discuss the implications, the sort of questions you will be asked, what to say and how to deal with matters.

At the meeting

The meeting may be held at your office or home, at an HMRC office or at your adviser’s office. We usually recommend that such meetings take place at our office and not in the tax office. We find this helps somewhat in putting clients more at ease at what can be a very stressful time.

At the start of the meeting, the Inspector should explain the purpose of the meeting and HMRC’s approach to the civil investigation of serious fraud. They will not reveal to you the information they hold that has given rise to selection of the case for enquiry or their concerns. This is because the aim of an investigation under this Code of Practice is to give you the opportunity to make a full and complete disclosure of all irregularities. The opportunity to make a disclosure extends to all aspects of your taxation affairs and encompasses any dealings you have had with partnerships, companies, trusts or other entities. To be blunt it’s a game of poker and they don’t want to reveal their hand!

You are free to leave a meeting with them at any time if you choose to do so.

It is a matter for you to decide whether or not to speak to HMRC or assist us generally in our investigation. If you do speak to then they may use what you say or any information you provide, in assessing your liability to tax or to a penalty. They may also seek to give evidence of this in any appeal proceedings. We recommend we attend meetings with you and that you do not discuss the enquiry on the telephone or outside of meetings where we are present.

If you decide to proceed, the next stage will be to ask you to respond ‘yes’ or ‘no’ to some formal questions: see next page.

The five questions which are asked in relation to direct taxes (Income tax, CGT etc but not vat) are:

  1.  

Have any transactions been omitted from or incorrectly recorded in the books of any business with which you are or have been concerned whether as a director, partner or sole proprietor to the best of your knowledge or belief?

  1.  

Are the accounts sent to HMRC for each and every business with which you are or have been concerned whether as a director, partner or sole proprietor, correct and complete to the best of your knowledge and belief?

  1.  

Are all the tax returns of each and every business with which you are or have been concerned whether as a director, partner or sole proprietor correct and complete to the best of your knowledge and belief?

  1.  

Are all your personal tax returns correct and complete to the best of your knowledge and belief?

  1.  

Will you allow an examination of all business books, business and private bank statements and any other business and private records in order that HMRC may be satisfied that your answers to the first four questions are correct?

Providing information

HM Revenue & Customs will ask you for the information and documents that they say they need. They should give you a reasonable amount of time to provide any information. We recommend that you provide the information via us. This will allow us to review it beforehand and to make any relevant recommendations to you as well as checking that the taxman is legally allowed to require what he/she asked for.

You should say straightaway if you have difficulty obtaining the information HMRC have requested. We will tell you and HM Revenue & Customs if we believe it is not relevant to their investigation. We will discuss and try to agree the situation with HM Revenue & Customs.

You should ensure that any information you provide and any answers you give are correct. If you are unsure about any matter you should say so. It is important that you give all the relevant facts even if you are in doubt about the tax consequences of a particular matter.

Again, we recommend that all information goes via us. Damage limitation may be vital.

Books and Records

Please make sure that you keep all existing records, including computer records, during any investigation whether or not you are required to do so by law. HM Revenue & Customs may ask to see your business and private financial records. They may ask to examine these at your premises but we may suggest they do so at our offices.

There may be occasions when HM Revenue exercise statutory powers conferred on them that allow them to remove certain records from you. If this happens, you will be provided with a receipt for those documents. If asked they will provide copies to you and at the end of the investigation they will return the originals to you.

There are penalties (up to a maximum of £3,000) for failing to keep records. In any case there is a statutory obligation to keep business records until they are over six years old and your records should help to protect you.

The better the records the better they protect you.

There is sometimes a false assumption that poor records hinder the taxman and make his case difficult. The opposite is true. Poor records enable to taxman to claim that they are unreliable and therefore the accounts based on them can be “broken” and additional amounts added to the stated profits.

What is the likely outcome of an enquiry?

HM Revenue investigators can instigate civil or criminal proceedings against companies, partnerships and individuals for a variety of tax offences. However, the most usual outcome hurts the taxpayers bank balance not his liberty.

The cost is likely to include:

  1. Any additional Tax

  2. Any additional Class 4 National Insurance

  3. Interest, going back to normal due date

  4. Penalties (See below)

If serious fraud is uncovered HM Revenue & Customs may consider civil or criminal proceedings. See the section headed “Going to Gaol” (“Jail” if you use the American spelling) further on in this document.

Penalties

The long standing system of penalties was abolished with effect from 1st September 2006 and replaced by a newer much more harsh and expensive penalty regime. The level of penalty (which is expressed as a percentage of the addition tax and NI liability) varies depending on the type of understatement (as viewed by HM Revenue & Customs). The types are:-

  • Careless

  • Deliberate, or

  • Deliberate and concealed

The penalty will also depend on whether you made an unprompted disclosure (it is too late once an enquiry has begun!)

HM Revenue & Customs will charge penalties for deliberate inaccuracies, or for deliberate and concealed inaccuracies, depending on the facts. Penalties for careless inaccuracies may also be charged where appropriate.

A penalty for a deliberate inaccuracy will normally apply where you deliberately:

  • understate the tax you owe

  • choose to misrepresent your liability

  • overstate a claim

A penalty for a deliberate and concealed inaccuracy will normally apply where you take active steps to cover up a deliberate inaccuracy.

The normal maximum and minimum penalty for each inaccuracy depends on the behaviour that caused it as follows:

Normal Penalties ie not unprompted disclosure.

inaccuracy despite taking reasonable care

no penalty

careless inaccuracy

between 15 per cent and 30 per cent

deliberate inaccuracy

between 35 per cent and 70 per cent

deliberate and concealed inaccuracy

between 50 per cent and 100 per cent

The figures are percentages of the tax lost.

If you have made an unprompted disclosure of the inaccuracy, that is, you have told us about it before you had any reason to believe that we have discovered or are about to discover it, then the minimum penalty is further reduced in each case as follows:

 

Penalties for Unprompted Disclosure

inaccuracy despite taking reasonable care

no penalty

careless inaccuracy

no penalty

deliberate inaccuracy

Up to 20 per cent

deliberate and concealed inaccuracy

Up to 30 per cent

Reductions under Penalties for Inaccuracies rules

The penalty may be set at any level between the maximum and the minimum and in calculating this HM Revenue & Customs will normally give the following reductions:

  • up to 30 per cent for 'telling' - the extent to which you admit the inaccuracy, tell HMRC promptly about its full extent and explain how it arose

  • up to 40 per cent for 'helping' - the extent to which you help HMRC to quantify the inaccuracy, give positive assistance, actively engage and volunteer information

  • up to 30 per cent for 'giving access' - the extent to which you respond positively to requests for information and documents, give HMRC access to business and other records and explain their function and significance

If you have made an unprompted disclosure of the inaccuracy the minimum penalty may be set at 20 per cent for deliberate error and at 30 per cent for deliberate and concealed error. An unprompted disclosure is one where you have told us about the irregularity before you had any reason to believe that HMRC had discovered or were about to discover it.

What if it drags on pointlessly?

 

There are special provisions for dealing with such circumstances and also where it is not possible to reach an agreement. It is not possible to deal with every aspect of tax enquiries in a fact sheet. We will of course advise and guide our clients on throughout any tax enquiry and on the best way to proceed.

Going to Gaol!

 

HM Revenue & Customs periodically like to take a high profile case to court and pursue a custodial sentence. This is very rare and usually involves either serious fraud or a well know personality so that it gets lots of press and TV coverage. If they win (as with Lester Piggott) is can scare some taxpayers into being more honest with their own affairs. If they lose (as with Ken Dodd) they look silly!

At the end of the enquiry you may well be asked to sign a certificate to say that you have disclosed everything. We will discuss this with you before you sign. This is a critical document. If you sign it but it then turns out you have not made full disclosure you may wish to contemplate what Lester Piggott’s former cell is like.

Hint: Do not sign a certificate of full disclosure and then pay the taxman the agreed amount from an undisclosed bank account! Disclose each and every account when you have the chance.

What about Accountancy Fees?

Firstly any such fees

  1. Are likely to be significant. Enquiries justifiably warrant being dealt with by a partner or at least a very senior, experienced and qualified member of staff. Accordingly the charge out rate will be set for a person of that skill and experience and will be subject to a loading because of the extra care and attention required in such cases.

  2. Are not an allowable expense for tax purposes.

  3. Can be covered by special schemes whereby our clients do not have to pay our fees for dealing with such tax enquiries, although of course extra tax, NI, interest and penalties are not covered. Please ask us if you would like details of this type of scheme. Some trade bodies offer similar schemes.

When are they payable?

If it is a short and simple enquiry, or our fees are covered by the type of scheme mentioned above, we may defer requesting payment until the end.

However, if it is taking some time or the fees are mounting up as a lot of work is done in a short period, we may give you interim bills as the work progresses.

How can we help you?

In this current climate, specialist support for taxpayers can help turn a potential nightmare into something more manageable.

A free initial consultation is offered, without obligation, for anyone for whom self assessment and its consequences are now proving why the HM Revenue & Customs dispensed with its original sound bite for self assessment, being a “simplification of personal tax”.

To find out how Handley Evans & Co can help you contact us

For information of users:
This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.