Tax Investigations (Last Updated 7th April 2009)

This topic can be quite emotive for accountants and business owners alike and the whole process is surrounded in mystery and the unknown for many people.  Obviously this can be advantageous for HMRC in that they often appear to hold the upper hand when conducting a tax enquiry.

With the right information and advice a Tax Enquiry can be straight forward and not necessarily something to fear.

Previously there were two main departments for tax collections within the UK tax system.  The Inland Revenue and HM Customs and Excise.  The Inland Revenue were often seem as the softer of the two with HM Customs and Excise a reputation for abrasive investigative practices.  The merger of the Inland Revenue and HM Customs and Excise into the new HMRC, (HM Revenue & Customs), has seen both areas become proactive and HM Customs and Excise practices are now being integrated into the whole tax collection systems.

Now, more than ever, the taxpayer is expected to fully understand the whole tax process fully and be able to comply with the requirements first time.

HMRC Tax Enquiries

HMRC will initiate an enquiry under certain Codes of Practice (COPs)

COP 11 - HMRC enquiries into tax returns

COP 8 - Deals with investigation of cases of suspected significant tax avoidance and evasion

COP 9 - Deals with investigation of cases of suspected serious tax fraud under the Civil Investigation of Fraud procedures.

The issue of COP 8 or COP 9 means that HMRC will not look to prosecute the taxpayer unless it becomes apparent that there are material false statements.  If this occurs the HMRC will withdraw the COP enquiry and the case will then be worked under the appropriate criminal code.

When deciding on the issuing of an enquiry and subsequent consideration for prosecution the HMRC will look to establish the outcome of 5 key disclosure questions:

 

Question 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?

 

Question 2

Are the accounts sent to the 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?

 

Question 3

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

 

Question 4

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

 

Question 5

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?

 

Case Selection

This is the area of tax investigations we hear the most rumors about and is the area that seems to be most commonly misinterpreted by the general public.

HMRC can open an enquiry into any return and they do not need to give specific reasons as to why they are doing so.

Random selection does take place and best estimates are that this impacts around 1 in 1,000 self assessment cases.

HMRC subdivide the taxpayer into the following categories:

 

Business Taxpayers:

 

1. Small Businesses

2. Medium Businesses

3. Large Businesses

4. Very Large Businesses

 

Non Business Taxpayers:

 

1. Complex

2. Other

 

HMRC have a large database of resources to draw on in order to determine issuing of an enquiry.  They use a large computer system that has information from a wide variety of sources such as:

 

1. Aircraft Registration Details

2. Boat Registration Details

3. Auctioneer Returns

4. Chargeable Events

5. Commission Fees

6. Double Tax Investment

7. Entertainers

8. Franchise Details

9. Land & Property Transactions

10. Licenses & Royalties

11. Copyright Information

12. Property Rents

13. Payments by Medical Insurers

14. Pensions & Benefits Payments

15. Private Dwelling Values

16. Overseas Property

17. Stockbroker Returns

 

HMRC may also use any information in the public domain such as websites, yellow pages, directory listings etc.  There are teams of people who’s sole job is to look at this sort of information and determine cases for enquiry. 

It is important to note that whilst the HMRC have access to such a large amount of information in their database, they don’t necessarily have the tools to access it in an efficient and effective way and in doing the analysis HMRC look to establish a risk of loss of tax.

 

They use certain factors also in determining cases and the results need to be carefully understood in order that innocent information does not lead to an unnecessary enquiry.

It is not in the HMRC’s interests to investigate unnecessarily, but then again their information may not be 100% accurate.

 

Things to Look out for:

 

· Low Business Drawings - This indicates that the owner has some other means of income

· Turnover consistently below VAT Registration Limit - Is the owner using cash sales to alter the true turnover position?

· Large Capital Introductions to a Business - How was this investment obtained?

· Changes to Business Ratios - What has caused the change?

 

Immediately you can see that the above is subjective reasoning and that there may be perfectly good explanations for the events.  However, this may not be immediately apparent to HMRC and in order for them to determine the causes HMRC may look to open an enquiry.

 

The HMRC have opened an Enquiry - What Can I do?

 

Preparation and planning will help you gain control of the situation and take the advantage away from the HMRC.

 

The most obvious things are usually the right things to do:

 

· Reply to correspondence and don’t ignore it!  Ignoring the problem will not make it go away.

· Be helpful and civil to the inspectors.  This can be hard if you feel you are being unfairly investigated, but there is no advantage to be gained by being unhelpful.  Being obstructive can sway the inspector’s view of your intentions and lead to a greater risk of a higher penalty in the event of anything found to be incorrect.

· If the HMRC makes an offer to settle the enquiry, consider it carefully, but remember you are not obligated to accept their first offer.  They are happy to negotiate a deal if it is reasonable to both parties.

· If you feel you are being treated unfairly, you can request that the enquiry be undertaken by another inspector.

· You know your business better than HMRC, think ahead and try and spot any weaknesses you can think of before the inspector does.

· It is also worth remembering that there are usually at least small errors in all businesses and the inspector will be making sure he finds at least one of them!

 

It is advisable to have a professional help you if you feel unsure about things and are not confident in dealing with the inspectors.

 

Penalties!

 

No one likes to talk about penalties and this area can be very subjective and complex.  As a rule of thumb, the table below gives a good indication of the guidelines HMRC are working to.

Unprompted,  basically means you have volunteered the information as an error or incorrect.  This is unlikely to be an option once an enquiry has been opened as the inspector will argue that any confessions at this stage are prompted, by the enquiry.

And finally, YES, we can help you if get a problem in this area.  We have a large amount of experience dealing with the HMRC and are able to take on enquiry cases.

 

Contact us for a free initial consultation.