The previous blogs on tax enquiry covered what triggers a tax inspection and tax inspection of your accounting records . This blog takes this further by explaining the type of tax enquiry you have. Please remember you can sign up for our monthly tax tips news letter to receive equally helpful information straight into your inbox. Just click here to sign up,
Technically HMRC now start with enquiries rather than investigations into your Tax Return. Let’s start with the basic facts…
- The enquiry may be an aspect enquiry into one aspect of your tax return or a general enquiry into the whole return.
- Over 250,000 enquires are carried out every year and most are innocent enough affairs but if it leads to a full-blown investigation, it’s not nice.
- The change to the self-assessment system has allowed HMRC to spend more time on enquiries and they have also put more and more resources into it.
- Interestingly, most enquiries are into the affairs of men, rather than women.
- HMRC are also becoming more business like, targeting the businesses where they are most likely to get a result.
- Whether they admit it or not, HMRC do have internal targets for the number of investigations to be carried out that are there to be met.
- HMRC may select you for enquiry for a reason or you may be chosen at random for a full enquiry.
- The problem is, they don’t tell you whether you have been picked randomly or not, and they don’t tell you what they already know. They often indicate they know something to make you confess to perhaps more than they know about.
- It all starts with a standard letter saying they are going to make an enquiry into your return and assuming you have an accountant, they will send a separate letter to them with the details of what their enquiries are. From this you can normally tell whether it is an aspect or general enquiry into the whole return.
- Aspect enquiries do have the potential to turn into full enquiries. A full enquiry will turn into an investigation when it spreads over into looking into your affairs for more than one year.
- With effect from 2007/08 onwards HMRC have one year after the date you file your tax return to enquire into it.
- After that you are safe unless they make a discovery of fraudulent or negligent behaviour. In these cases they can go back up to 20 years, although 6 years is the norm. It therefore helps to give them all relevant information when submitting your return to help ensure finality.
- Even your death isn’t the end of the matter as the enquiry can still continue through your representatives. In war, your death is the end, but not so with tax.
As an example, let us say the Taxman finds just £1000 of income that hasn’t been declared on a return, the tax on this could be £400.
If they can show this was likely (not proven) to have occurred for 6 years, that tax bill becomes £2400. Interest will now be due on this, which could perhaps be another £1000.
In addition, there can be a penalty that can be as much as the tax. And in some situations from 1 April 2011 this can be up to 200% of the tax for those with financial interests outside the UK who have failed to declare the full extent of their offshore liabilities.
You are now looking at a tax bill of up to £5800, just because they found £1000 of income missing in one year.
Imagine how much you’re looking at if £20,000 was missing from your accounts in a year.
Aspect enquiries often tend not to lead to fines and penalties but general enquiries are more likely to. Jail is always an option but very rare amongst small businesses and is reserved for cases of serious fraud.
Accountants are more likely to go to jail for tax evasion and no doubt lists of dodgy agents exist at local tax offices whose clients are therefore more prone to enquiry.
The problem with investigations is that the Inspector seems to have all the time in the world to go through your affairs with a fine tooth comb, to the extent of identifying what restaurants you eat in, where you go on holiday, etc. They do this to try to prove the income declared in your accounts cannot support your lifestyle. They may want detailed information going back years.
- Remember why you didn’t have any cash takings on the 3rd November 2001?
- Identify where a banking in your private bank account 6 years ago for £123.18 came from?
- Remember how much a week you spent on milk in 2002?
It’s not out of the question that some tax inspectors will want to know the answers and be suspicious if you can’t answer.
The taxpayer on the other hand has to pay an accountant and so time is often limited by cost constraints and even when you’ve done nothing wrong. It can end up being easier for some taxpayers to just give up the fight, particularly when the investigation has been going on for a couple of years.
Please note a full investigation can take years, not months to conclude.
Both the financial pressure and the pressure of just dealing with the investigation enquiries can be an enormous strain to taxpayers if they let it get on top of them. It’s important not to panic or be pressurised into surrendering.
Also, did you know accountancy expenses in dealing with a tax investigation are not usually deductible as an expense against tax.
Sometimes it doesn’t pay to own your own home, have savings, etc. There are some clients that just don’t worry about a Tax Investigation and are happy to concede whatever the Taxman wants. Often, these are clients with few assets who know that whatever the Inspectors finds, they can’t pay. If you haven’t got the assets to pay, HMRC aren’t going to be able to take anything from you. If this is the case with you, it helps to point this out at an early stage.
Remember also, ignorance of the law is no excuse. As Lord Denning once said, “ignorance is a misfortune, not a privilege.”