They keep a file on you so that as much information as possible is kept in one place.
This means that they can review your affairs properly and it is often information from other sources that may lead to an investigation. So ensure you are properly prepared before meeting with the inspector as they have information from many sources…
HMRC have a special hotline for informers to call as well as being able to report via the HMRC website and all informers can do so anonymously if they wish. There are many jealous neighbours, disgruntled customers, exlovers and particularly ex spouses out there. Not all accusations are true but it could be the start of your enquiry.
The Curious Inspector
Part of the make up of being a tax inspector is to be naturally curious. How do their neighbours afford that expensive new car? They read local newspapers; scan the Internet, etc looking for anything that they can check against the information they hold on you.
If you’re going to do a job cheaper for cash, you’d better hope, it’s not for a tax inspector. Do you know what all your customers do for a living?
From Other Taxpayer Enquiries
Fred in the course of his investigation mentions that you lent him £15000. The Taxman may want to discuss with you where you got this £15,000 from.
Other Taxpayers Accounts
For, example the inspector can request details of who commissions or rent in another taxpayer’s accounts are paid to, in order to ensure they are declared by the recipient.
Links With Customs & Excise & Government Departments
The Revenue are now combined with Customs & Excise as well as having better links with other government departments. This also means that when your investigation finishes and you have undeclared cash takings, you are also likely to be clobbered by the VAT man for the VAT due on them. Even worse, if you weren’t registered and your higher income now puts you over the VAT registration limit.
The Stamp office will report property transactions.
Explanations On Your Tax Return Or rather, a lack of them. For owners of small businesses, enquiries often stem from their business accounts. The simplest way to avoid an investigation is to avoid an enquiry being made into your Return in the first place. The best way to do this is to explain anything unusual when your Tax Return is submitted rather than just sending it in without any explanations.
Your Tax Return is originally processed by a computer that carries out analytical checks on the figures to look for unusual items. If you know there is something unusual, explain it in the white space on your return, and then HMRC are far less likely to start an enquiry. It is crucial your accountant does this although often it doesn’t seem to happen.
Examples of things you might explain:
♦ If profits or drawings are low, how have you lived?
♦ If you introduced some money into the business, where did it come from?
♦ If the gross profit margin has changed significantly, why is this?
♦ If any expenses are unusually high, why is this?
♦ If sales have fallen, why is this?
You are looking for anything that is unusual, looking particularly at what HMRC already knows about you from previous years.
Most of these will have simple explanations, so give them now and stop an enquiry being made.
Another reason for an enquiry could be that you haven’t declared any interest being received in the year but HMRC knows you have an interest earning account. Is this where you have filtered away undeclared profits they wonder?
Get It In On Time
Sending Returns in late is also more likely to lead to an enquiry, so be organised. After all, if your Return goes in late it’s an indication you are disorganised and so maybe your accounting records are a bit disorganised and may not be correct.
Random enquiries – a percentage of returns are also randomly selected for enquiry and there’s nothing you can do to prevent this
Remember also, ignorance of the law is no excuse. As Lord Denning once said, “ignorance is a misfortune, not a privilege.”