Keep cool under tax investigations

With a tax gap estimated at £40bn, HM Revenue and Customs (HMRC) is taking a tough approach to reducing the shortfall – and all businesses are potentially under threat of investigation.

It is difficult to overstate the disruptive impact investigations can have, not only on commercial operations, but also in some cases on the private lives of business owners. This risk has been significantly elevated because HMRC has been ordered to reduce the tax gap by £7bn over the next four years.

HMRC uses the expression ‘breaking the records’. This means that once an inspector has shown weaknesses in any area of a company’s records, the credibility of the records as a whole can be undermined. This immediately gives the inspector a major advantage and HMRC has won a string of cases where it has successfully assessed businesses on its own estimated figures, simply because records were flawed.

Worse still, HMRC will argue it has justification for extending its investigation into the private affairs of the owner. We expect HMRC to target businesses perceived as high risk. Companies that persistently file late returns, or pay tax late without contacting HMRC to explain why, will attract unwanted attention.

In the eyes of HMRC, a business that submits returns late does not take tax compliance seriously, and represents ‘easy prey’. HMRC will also look at the sector in which the business operates, and from time to time, will target particular areas. For example, hotels and restaurants in the North West are currently in the spotlight.

Tax investigation work is a specialist and time-intensive area. It often surprises people that dealing with investigations can cost considerably more than the fee for preparing the accounts under review.

When an inspector calls, the first step is not to assume HMRC has contacted your accountant about the investigation or inspection. Call your accountant before you do anything. The next step is to prepare, and a properly qualified professional advisor will be able to advise you exactly how.

The first meeting with HMRC is critical: inspectors are very good at catching taxpayers off guard in a friendly initial meeting, and then using ‘throwaway comments’ as evidence to support ambitious tax assessments at a later stage.

If you know something is wrong, don’t try to hide it. An early, voluntary disclosure will reduce any final settlement with HMRC. Keep in mind that at the end of an investigation, a certificate of full disclosure must be signed, and HMRC will take criminal proceedings against people found to have knowingly signed incorrect statements.

When HMRC start an enquiry or investigation, it is for a reason. It should not be assumed the enquiry is a random event. In practice, virtually all investigations are started because HMRC inspectors think there is tax at risk. Thumping the table will not persuade them otherwise – just the opposite. The key is to identify the concerns and deal with them. That way, the case can be closed at the earliest possible opportunity.

Meanwhile, The deadline for paper tax returns is this Monday, October 31 and HMRC is urging anyone who hasn’t yet filed their paper return to act now, to avoid a late-filing penalty.

Around 874,000 people are expected to file a Self Assessment return in the North West this year and if you send in a paper tax return on or after 1 November, you will now be hit with a £100 penalty – even if there is no tax to pay or the tax due is paid on time.

And the longer you delay, the more you'll have to pay, as there are further late-filing penalties after three, six and twelve months.

You can still avoid a penalty by sending your tax return online instead, for which the deadline is January 31.

David Bennett
Moore and Smalley Chartered Accountants and Business Advisors