Any system of self-assessment must contain an enquiry power as part of its mechanism. HMRC must have the right to enquire into any tax return which is filed.

Of course, HMRC enquiries go beyond this and will cover company tax returns, VAT and excise issues and  PAYE returns of employers.

Most often, a tax enquiry into a self-assessment tax return will concentrate on one specific aspect. For example, if you have disclosed a redundancy settlement on your tax return then HMRC may want to check that this has been correctly disclosed as the taxation of severance payments is a complex issue.

Beyond that, HMRC will routinely gather intelligence data and if they have information which conflicts with your tax return then they may open an enquiry to investigate this issue but they may also consider that if you have made one error in your tax return they could well be others.

In some cases, HMRC may have gathered sufficient intelligence data to believe that the disclosures on your tax return do not match your “lifestyle” and in these cases they will consider a full enquiry into the whole range of your financial affairs in order to satisfy themselves that the tax returns have been filed correctly.

For the most serious cases, HMRC have the power to take criminal proceedings as they are a prosecuting authority under UK law. They have a policy on criminal prosecutions at http://www.hmrc.gov.uk/prosecutions/crim-inv-policy.htm

Tax Investigations

Why am I picked for a tax enquiry?

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"Nice try kid, but I think you just brought a knife. To a gunfight.”


Indiana Jones

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I guess it’s not a problem if my tax return is correct?

Penalties - The Final Insult

You couldn’t be more wrong.

Tax enquiries are full of traps for the unwary. What might start out as a friendly meeting with the tax inspector in order to discuss a few points can soon turn into a nightmare with the taxpayer inadvertently giving the inspector ammunition to make assumptions about his or her lifestyle - and therefore pushing up the potential settlement tax bill.

The unrepresented taxpayer can often inadvertently open up new areas of enquiry thereby prolonging the enquiry and increasing the risk of a tax cost.

Here in the UK we tend to work on the assumption of “innocent until proven guilty”. Unfortunately, in a tax enquiry the opposite is true.

As you will see in the real life case study given below, once HMRC have found an error (no matter how small) they will use this as a lever to extrapolate figures, often wholly fictional, which assume that you have committed the error over and over throughout the period of the enquiry. As you can imagine, this can lead to a large tax bill.

The problem is that once you find yourself in this situation you must prove that the tax inspector’s figures are wrong. Even with a good accountant on your side this can be an expensive and lengthy process.

Insuring Against the Risk

The Burden of Proof

When working out the settlement figure to close an enquiry, the starting point is of course the amount of tax which the inspector has found to be due.

Added to this will be interest charges on this additional tax. The interest runs from the date when the tax would originally have been due so, for example, if the inspector is currently looking at your 2015 tax return (year ended April 5, 2015) the tax for that year would originally have been payable by January 31, 2016 and so any interest in an enquiry case will be calculated from that date. Interest could run from an earlier date where payments on account are involved.

The final aspect of the enquiry is the penalty to be charged.

The tax investigation penalties will start at 100% of the tax due in normal tax investigation cases but can be up to 200% of the tax due.

This is the starting point for tax penalties and the Inspector will often agree a remission of the penalty depending upon the seriousness of the offence, the co-operation received from the person under enquiry (and their accountant) and whether the additional taxes due to a lack of reasonable care or a deliberate act.

Although you cannot insure to cover any additional tax, interest or penalties which may be due as a result of a tax enquiry, you can ensure to cover the fee cost of professional representation.

Like most accountants, Cambridge Tax Practice offers fee protection insurance. If you’re interested in taking out cover please contact us for a quote.

A Case Study

We are indebted to David Hancock of of David Hancock & Co accountants who has given us permission to reproduce the following case study taken from his blog. This is an abridged version and the original version can be found here.

Although this is not a typical enquiry, many of the stages which the enquiry went through are very typical -

HMRC have a responsibility to look not just at the person under enquiry but also at any associated parties where an indication of wrong doing is suspected.

Also, HMRC are particularly interested in organised criminal activities including money-laundering and where necessary they will withhold conclusion of an enquiry while the scope of the original enquiry is widened.

This is a true story.

My client, let us call him Mr Green, is a self-employed on-course bookmaker by trade. From a young age Mr Green was used to seeing large amounts of cash in the family. Nothing wrong with that. It was the way they lived.

As a bookmaker, he deals in cash every day. He has a cash float at all times – sometimes amounting to many tens of thousands of pounds.

Mr Green has never been one for traditional bookkeeping. He does though keep the detailed records of his daily bookmaking trading results plus a pile of receipts for his business expenditure which he lists and totals at the end of each year. His tax returns are prepared from these records.

October 2007 :

HMRC notified Mr Green that they were launching a full enquiry into his 2005/06 tax return.

I provided information and answers to HMRC’s initial correspondence over the next few months. Mr Green took his bank statements and other records in to HMRC. As Mr Green’s business and private affairs were not segregated HMRC was entitled to obtain all his personal bank and credit card statements.

HMRC invited Mr Green for a meeting. As Mr Green had nothing to hide he was relaxed about going to a meeting with HMRC in order to clear things up as quickly as possible rather than insist that the whole process was dealt with by correspondence.

However, before the meeting date, something else cropped up.

March 2008 : Cash Seizure

By coincidence, and completely unrelated to the HMRC enquiry that was under way, an event took place that was to have major significance.

One day in March 2008 Mr Green and his parents were driving back from a trip to France when their car was stopped by Customs (HMRC Dover) for a routine inspection. Mr Green was asked “Are you carrying any cash?”, to which he replied “Yes”. “How much cash?” he was asked. “About £30,000” he replied. Not the answer the officials were expecting, but Mr Green could only tell the truth.

HMRC Dover confiscated his cash there and then, and subsequently notified him that it would not be returned until they were satisfied that the cash had come from a legitimate source, which he would have to prove to them.

Mr Green appointed solicitors to act for him in relation to the return of his cash.

April 2008 :

I wrote to HMRC Dover explaining Mr Green’s need to hold large amounts of cash for business purposes and that this was well known by and on record with HMRC. (This point had been established in a previous HMRC Enquiry).

However, HMRC Dover would not budge and the lawyers set to work.

It was agreed that I would prepare an analysis proving that the cash held by Mr Green on the date of seizure did indeed come from legitimate sources.

July 2008 : The first meeting – main Enquiry

I attended a meeting with Mr Green and HMRC in relation to the Enquiry into his 2005/06 Return.

It was an ambush.

HMRC were represented by the case inspector and her superior. The inspector worked through a long, written script and asked Mr Green questions about his business and private life in 2005/06 plus detailed questions arising from her review of the records.

Mr Green couldn’t remember key facts. HMRC could not understand how Mr Green’s lifestyle could be supported by the low trading profits. The inspector produced an analysis of the available information based on Mr Green’s multiple bank accounts suggesting there was substantial undeclared income.

It didn’t help that Mr Green had made some arithmetic mistakes in his lists of daily betting profits. Not many, but mostly mistakes that reduced the declared profits and thus feeding HMRC’s suspicions about Mr Green. The inspector suggested these were not innocent mistakes, but a deliberate downward manipulation of the figures and she intended to engage the services of a forgery expert to prove it (she never did).

The mistakes were not greatly significant in the context of this case, and they were readily admitted and the small tax adjustment accepted. But the inspector was seeing them as part of a pattern.

HMRC pointed to clusters of bankings and withdrawals of cash across Mr Green’s bank accounts for certain periods which, when looked at in a certain way, appeared to be suspicious. Explanations were subsequently provided, but at the time of this meeting the blizzard of accusations was too much for Mr Green to respond to sensibly.

HMRC placed the worst possible light on all the available information in Mr Green’s bank and credit card statements for the period, drawing inferences about a possible alternative lifestyle fuelled by undeclared income.

A dramatic point arrived in the meeting when the HMRC duo announced they would leave the room so that I could confer with Mr Green. When they returned they expected to hear whether my client was prepared to make an admission of undeclared earnings.

Alone with Mr Green he was absolutely clear that he has nothing to hide and had no undeclared earnings or other source of undisclosed income. Yet he could not remember/explain much of HMRC’s apparent findings.

The HMRC officials returned to the room and I told them my client did not have any undeclared income and was not making any admission or disclosure to them.

I also explained that in my view what was needed was an overview showing how Mr Green’s business and personal transactions could be shown to reconcile with his bank and cash holdings at the beginning and end of the year. I said I would prepare this for HMRC but it would take some time. This reconciliation would also be used to satisfy HMRC Dover and obtain a return of Mr Green’s cash.

HMRC concluded the meeting by giving Mr Green a formal Notice of Enquiry into his 2006/07 return. They were convinced “something was going on”. In order to protect HMRC’s position they were going to:

  1. carry out a full books and records enquiry into Mr Green’s 2006/07 affairs as well as 2005/06

  2. write to me formally setting out their questions and concerns, so that I could provide explanations, and

  3. raise assessments based on their findings in order to collect the tax which they believed was due

Why was Mr Green selected for Enquiry?

HMRC will never disclose the reason for launching an enquiry. It could be random, or it could be targeted – for example low profits below industry norms.  Or they could be acting on information.

HMRC have enquired into his tax affairs twice before. Once in the 1990s and then a few years before the current enquiry. No significant adjustments to profits arose from the earlier enquiries. It is possible that HMRC had simply regarded him as high risk – i.e. a cash based business with no formal bookkeeping system – and have decided to check him out every few years.

August 2008 : The HMRC Assessments

HMRC Portsmouth wrote to me with pages and pages of questions. Basically, they wanted documentary evidence of every single bank transaction in every single bank and credit card account for 2005/06 and 2006/07. Most of Mr Green’s records had been lost during the lengthy divorce court proceedings, so copies of statements, paid cheques etc had to be obtained from the banks, and other documentation had to be found.

When the HMRC assessments arrived Mr Green didn’t know whether to laugh or cry. He actually laughed. Quite a lot. He thought the whole thing was a joke.

But HMRC were serious.

When HMRC consider they have made a “discovery” they are entitled to invoke the principle of continuity. If they have a finding for one year they can claim that the under-declarations have been going on in past years. It is then up to the taxpayer to prove that this is not the case.

Clearly HMRC considered they were dealing with a case of massive dishonestly. They raised assessments going back 10 years, assessing additional profits over the 10 years of £2,683,969 with an assessment of £1,040,291 tax and NIC plus interest and penalties.

There were detailed calculations for each of the 10 years. Pages of figures to wade through.

I prepared 10 appeal documents, formally appealing against each assessment, together with an application to postpone the tax demand for each year while we convince the Inspector that the assessments should be withdrawn and there was no tax to pay.

Questions and answers

During the following months I provided explanations and documents to HMRC Portsmouth while working on the overall reconciliation of Mr Green’s personal and business figures.

I was also working with Mr Green’s solicitors on the cash seized case.

More questions were coming from HMRC Portsmouth. It seemed that each time we provided information or an explanation this would simply generate additional requests from HMRC for further information or documents.

January 2009 : The 3 year Cash/Funds statement

In January 2009 we completed the 3-year cash/funds statement. This showed the daily movement of cash from April 2005 to March 2008. The opening cash figure was based on a Statement of Assets signed by Mr Green at the conclusion of the earlier HMRC enquiry. The closing cash figure was given to us by HMRC themselves – it was the amount of cash held by Mr Green in March 2008 when it was seized.

The figures linked with the Mr Green’s daily business profits and all his personal income and expenditure, as well as balancing to the bank and cash balances at the end of each year.

This was an extremely difficult piece of work. We had to get to know and understand every aspect of Mr Green’s business and personal life in order to build up this detailed picture.

My conclusion was that this reconciliation demonstrated that there were no undisclosed earnings and I explained this in a report accompanying the detailed figures.

Cash seized – outcome

I attended meetings with Mr Green’s Counsel in preparation for a court case as HMRC Dover would not return his cash despite having received my Cash/Funds Statement and Report.

In April 2009 the case leader from HMRC Dover together with an HMRC forensic accountant spent most of the day in our office reviewing and checking our working papers supporting the Cash/Funds Statement. They left satisfied, and indeed were complimentary of our work.

March 2010 :

However, it took nearly a year for HMRC Dover (by then The Border Agency) to formally withdraw from the proceedings and to return the cash to Mr Green, which they did in March 2010.

HMRC Dover paid Mr Green’s costs of £26k (mostly legal). We heard that HMRC also had to pay their own legal costs of over £100k.

HMRC Enquiries into 2005/06 and 2006/07

Meanwhile HMRC Portsmouth were continuing with their demands for information and refused to give any weight to our Cash/Funds Statement.

February 2010 :  

I wrote to the Inspector stating that in my view she has enough information and evidence to close down the enquiry and withdraw the assessments. I set out the reasons why she would be entitled to take this action.

The relatively small mistakes that had been made were admitted as was the extra tax arising (about £1,700), but beyond that there should be nothing further to pay.

HMRC ignored my advice and ploughed on with further questions.

September 2010 :

We had reached stalemate. All possible information and explanations had been provided to HMRC but the Inspector pointed to a list of questions that had not been answered to her satisfaction and was not prepared to close the case down.

At this point I formally requested that HMRC carry out a review of the case. A review is carried out by a member of HMRC staff not previously involved in the case.

October 2010 :

The inspector produced a 22-page document setting out her conclusions and quantifying a figure of £140k additional taxable profits for 2005/06 based on matters which she considered had not been adequately explained, proved or documented. This result was rolled back to 1996/07 and forward to 2007/08 – i.e. the presumption being that the alleged under-declaration of profits had been going on for 10 years.

The resultant tax and NIC payable was £593,590 plus interest and penalties.

The Inspector did not accept the figures in my cash/funds statement as there were aspects of the opening cash balance she did not accept and in particular she did not accept that large amounts of cash had been provided to Mr Green by his father despite his father having provided a signed statement to that effect.

December 2010 :

HMRC quantified the penalties they would be going for as £296,796. Total tax and penalties claimed were therefore £890,386 plus interest.

February 2011 :

I had a preliminary exchange of information with the HMRC officer who had been appointed to carry out the Review of this case.

March 2011 : Alternative Dispute Resolution

I received a phone call from a member of a new HMRC Alternative Dispute Resolution (“ADR”) team. He offered to include Mr Green’s case in a new pilot ADR program that HMRC was trying out.

The objective of the ADR is to use an experienced HMRC Facilitator to make it possible to settle disputes between HMRC and the taxpayer in cases which are deadlocked and heading towards the Tribunal.

There seemed nothing to lose so we agreed to go through the ADR process as did the Inspector.

July 2011 :

We had a meeting at the HMRC office around a big table. The ADR Facilitator was at the top end. The inspector and an HMRC colleague were on one side. On our side were Mr Green, his father and myself.

The meeting got nowhere. The Inspector was not changing her mind and Mr Green was not going to volunteer to pay additional tax when he had not done anything wrong (apart from the few small mistakes which were admitted and agreed).

There was a farcical discussion about a possible negotiated settlement. Mr Green might be prepared to agree to a few thousand pounds additional tax simply to close the case – on the basis that his continued costs might be something like this. HMRC was looking for six figures.

I was waiting for common sense to break out on HMRC’s side of the table, but to no avail.

After the meeting I had further telephone conversations with the Inspector about a possible settlement but we could not reach agreement.

November 2011 : The Review

We returned to the standard process and the designated HMRC officer carried out a formal review of the case. The conclusion of the review was that the decisions made by the inspector should be upheld in full. We had 30 days to appeal to the tribunal.

Next stop the Tribunals Service.

December 2011 : Tribunal Appeal

I lodged a formal appeal to the Tribunals Service.

Specialist help

I recommended to Mr Green that he obtains the services of a tribunals specialist to represent him at the forthcoming tribunal hearing. Mr Green agreed to this.

March 2012 :

I made contact with Martyn Arthur, (a) forensic accountant (and) tribunal appellant. We discussed the issues and he agreed to meet with me and Mr Green to discuss the case.

April 2012 :

Martyn agreed to take on the case. He is clearly on a mission to help clients in just this sort of situation. While he could give no guarantee of winning, this was a case that he felt simply had to be won if justice was to be served.

Our strategy was that Martyn would deal with tribunal procedures and tactics, effectively he would mastermind and run the tribunal hearing, while I would present the cash/funds statement and related matters at the tribunal.

February 2013 : The Tribunal process

The tribunal is completely independent of HMRC. Proceedings are informal. As you can see from Martyn’s website he is a great fan of the Tribunal system.

It took a while to get a firm tribunal date. The diaries of all participants had to line up with available court dates.

February 2014 : The Tribunal Hearing

The day of the tribunal hearing arrived, held in the Southampton court buildings in February 2014.

HMRC had reduced their claim for tax and penalties to £485,783 (plus interest) – having reduced the “roll-back” of additional profits to 2002/03.

I turned up with a suitcase full of files. Both sides waited in separate rooms until the moment we were “called in”.

The tables were getting bigger.

The Judge and a lay-person were seated on one side of an enormous table. On the other side were me, Martyn and the HMRC advocate The HMRC advocate was not the inspector on the case, but a specialist in making the case at tribunals, much as Martyn was acting for Mr Green.

Behind us sat the witnesses. As this was an open session anyone could have come in to hear the case and sit at the back. A few people drifted in and out – generally officials related to the case.

In the corner of the room were two tribunal staff, sitting at their desks and looking after the administrative arrangements.

There was quite a bit of legal and procedural discussion to start with. The setting was indeed informal, for example from time to time the Judge would speak to Mr Green sitting at the back to clarify or explain a point.

Martyn and the HMRC advocate presented their cases in outline. There was discussion about whether they could fit in the first witness before lunch. Yes there would be time, so let’s have the first witness – yours truly.

Before I got going the Judge wondered whether I should stay sitting where I was to give my presentation or instead be sworn in and go to the end of the table to the spot where witnesses give evidence. Would I mind giving evidence under oath, as a witness? “No, of course I wouldn’t mind” I heard myself say.

So I proceeded to the end of the table was sworn in and off I went.

I took the judge through the work we had done on the 3 year cash/funds statement, talked him through all the figures in outline and explained my reasoning and the conclusions I had come to as set out in my report. The judge asked a few questions as we went along as did the lay-person and it all seemed to go OK.

When I finished my presentation Martyn asked me a few questions by way of clarification, and I was then cross-examined briefly by the HMRC advocate, which also went OK.

My evidence was over and the tribunal broke for lunch.

In the afternoon Mr Green and his father both gave their evidence as did the HMRC inspector who had by then retired from HMRC but still had to come to the tribunal and appear as a witness.

Martyn gave the HMRC inspector a good grilling in the witness chair. Martyn was well prepared and at the top of his game. It is tempting to think it would be easy to have a go at representing someone in a tribunal – but believe me, when you are in that room it is awfully difficult to collect your thoughts and deal with issues as they arise.

The tribunal was adjourned and would re-convene in the morning for final arguments. Overnight both sides prepared final submissions which were handed to the tribunal in the morning.

Final arguments etc lasted just an hour or so, and then the tribunal was over.

The judge said he would aim to issue his decision before Easter. If HMRC had won the case Mr Green would be bankrupt. If we had won the case, Mr Green could resume normal life after six years of anxiety.

It was now up to the Judge.

March 2014 : The Judge’s Decision

13 pages of carefully reasoned argument and then the decision. “….we allow the appeals in part and direct that the parties use their best endeavours to determine the figures in respect of the assessments, amendments and penalty determinations in the light of our findings….”

We could go back to the tribunal if we were unable to reach agreement with HMRC within 90 days.

As I read and re-read the 13 page decision I gradually realised that yes, we had won. Within his decision the Judge made two key findings.

He found that :

  1. Mr Green’s father was truthful about the cash loans made to Mr Green and therefore that aspect of the cash/funds statement should be accepted (and not rejected/ignored by HMRC), and

  2. the opening cash figure in the cash/funds Statement should be accepted (and not rejected/ignored by HMRC).

April 2014 :

I wrote to HMRC with my analysis of the Judge’s decision and asked for their agreement.

I stated that HMRC now have to accept that the cash/funds statement proves that “…there were no additional business profits in the period and that all Mr Green’s cash and bank funds were derived from legitimate sources……..and that additional profits are not just unlikely - they are impossible”

Therefore HMRC’s additional assessments must all be withdrawn and we return to the relatively small additional amount of tax arising from the admitted few mistakes in Mr Green’s workings as set out in my letter to the Inspector back in October 2008.

As the HMRC inspector on the case has now retired, another inspector had been assigned to the case.

After reviewing the case the new HMRC inspector phoned me. He agreed with my analysis of the Judge’s decision as set out in my recent letter. All additional assessments would be withdrawn for all years, leaving the small amount of tax arising on the mistakes plus a 40% penalty based on this small amount payable.

The assessments originally standing at over £1m tax have gone.

Life returns to normal for Mr Green.

Current HMRC Strategy

As of December 2014 HMRC had announced its latest Task Forces along with details of its forthcoming campaign focusing on landlords.

The current task forces are :

Construction industry – London. HMRC expects to raise £3 million from this sector.

Security guards, bouncers and their employers – London and the South East. HMRC has seen an increased risk of fraudulent VAT repayment claims in this business sector and expects to collect £10 million.

Second-hand motor traders – Midlands. £3 million is the anticipated yield from this Task Force.

Hidden wealth / ’means’ issues – Midlands. HMRC expects to deliver £3 million from comparing people’s lifestyles to known assets, in what is likely to be highly contentious Task Force activity.

The Let Property Campaign is designed to encourage residential property landlords to come forward and voluntarily disclose any undeclared rental income to HM Revenue & Customs.

Although the campaign will be directed at all residential landlords, HMRC is particularly focusing on:

  1. BulletLandlords who let to students/groups of workers.

  2. BulletLandlords who let out holiday accommodation.

  3. BulletLandlords who let out properties for multiple occupancy.

Second Incomes Campaign - gives employees who have not declared additional untaxed income a chance to pay the tax they owe.

Credit Card Sales Campaign - offers an opportunity for businesses that accept credit and debit card payments to bring their tax affairs up to date.

Health and Wellbeing Tax Plan - a voluntary disclosure opportunity if you work in the field of health and wellbeing.

My Tax Return Catchup has now ended.

Data Profiling

HMRC are looking into new methods for reducing tax fraud and error. A trial in 2013 identified £20m of potential losses.

HMRC intends to introduce sophisticated data analytics as part of it’s strategy. Matters are at a trial stage and it is expected that the private sector will be asked to tender for the systems implementation work.

Trials with Transactis and Bosch have already been run. Both were recruited to carry out the small-scale trial in line with standard Cabinet Office rules. A summary of the trial is due to published in the near future, although no date has been selected as yet.

The overall aim is to add capacity to HMRC's existing workforce in order to significantly increase the number of successful tax credits compliance interventions and to drive down error.

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This article was written by a consultant at Solar Tax to update accountants on HMRC enquiry tactics :


Whilst HMRC can launch an investigation into a business at any time within the statutory time limits enquiry notices are usually timed to be issued at specific times of the year in order to control work flow within the department. Most practitioners will be aware that a favoured time of the year is the end of January – accountants are hoping that their problem clients may have avoided an enquiry only to have those hopes dashed by an enquiry notice dated right at the very end of the month.

The initial letter from HMRC can be quite intimidating as HMRC tend to throw the kitchen sink at it. The letter will often embrace every single aspect of the business and will often be a standard template padded out in parts by reference to the particular client. This can be evidenced by a request for an analysis of debtors in a case where debtors amounted to £6! When this was gently pointed out to HMRC, the reply rather huffily said that HMRC was entitled to ask for the information and it should therefore be provided! Common sense eventually prevailed and no analysis was provided!

Fridays are another favoured time for issuing enquiry notices – what better way to start a weekend than to open the post on Saturday morning and discover that HMRC is about to investigate your business?

The modern way is for HMRC to impose a non-statutory time limit on the taxpayer for the production of the information requested in the opening letter. It will often not be possible to provide this within the time frame specified, and it is advisable to make contact very quickly with HMRC if this is the case and agree an extended deadline. This can be useful in both getting some sort of relationship started with the officer dealing with the enquiry and also gaining maximum penalty mitigation relating to cooperation if the worst happens and there is culpability.

HMRC has a variety of techniques which are employed in deciding whether or not a business should be investigated. This “risk assessment” process can be very informative as it will compare the results of the business to other similar businesses; it will produce statistics such as gross profit margin, mark-up rate and comparisons to earlier years. The problem is that if a case is “risk assessed” the officer cannot decline the invitation to investigate. Officers have quite openly admitted that they had no choice but to open an enquiry, even though they knew that there was nothing in it for them, because the risk assessment process had identified the case as warranting an enquiry.

Accountants do not have access to the risk assessment software used by HMRC, so what are the trigger points to look out for?

The simple answer is patterns!

HMRC loves to see consistency across a business, both within the business itself and also across similar businesses. It will expect turnover to be fairly level whilst accepting modest fluctuations in either direction. If turnover goes down it will expect expenses to decrease. If profit goes down HMRC will raise an eyebrow if proprietors’ drawings/directors remuneration goes up!

If turnover increases substantially it begs the thought that maybe not all of the turnover in the previous year was declared. If it drops significantly then maybe some has been taken by the owner and not declared?

Suspicion is aroused if the claim in respect of power and light increases well beyond what would be expected comparing it with the previous year (and bearing in mind known increases in tariff). The HMRC officer will wonder whether working hours have increased (hence the increase in power/light) and therefore the officer will wonder why turnover has gone down!

Proprietors’ drawings will be similarly scrutinised – a substantial increase could mean that drawings may have been understated in the past, leading HMRC to wonder whether any cash takings have found their way into the proprietors pocket rather than the company’s books. If the drawings are less than the salary paid to the highest paid employee HMRC will be very uneasy – business owners are expected to be the highest earners in the business!

Gross profit margins are a favourite barometer for judging whether or not a businessman is declaring all of his income to HMRC. The GPR of the business will be examined over a period of up to 6 years to see whether or not it is consistent. It will also be compared to similar businesses and fluctuations of more than 3% will arouse suspicion. HMRC has access to a wealth of information to indicate what the GPR of a particular type of business should be and will be well aware of most of the tricks which the less scrupulous businessman may try in order to disguise the true GPR of his business.

Clients will often be amazed at the depth of knowledge which HMRC may have concerning their business. HMRC has access to information concerning for example the amount of wastage which an experienced butcher would expect from preparing a pig for sale, the wastage which a chef would suffer when grilling a 10 ounce steak. In my previous life as a tax inspector I was present in the kitchen of a Greek restaurant weighing each ingredient as a tray of moussaka was prepared. This enabled me to calculate the profit margin on each serving and led to a rather large adjustment in the accounts!

HMRC will scrutinise invoices carefully. I had a client some years ago who had a Chinese takeaway. HMRC found that when purchasing potatoes the proprietor bought 5 sacks for which he paid by cheque with a further two sacks for which he paid in cash. The two sacks for cash were converted to chips and the sales were not recorded, thus the GPR was unaffected by the unrecorded sale. How did HMRC discover this? – it was written on every invoice “five sacks by cheque plus two by cash”!! This practice had been going on for years and a significant settlement was agreed with HMRC!

HMRC will often target a particular sector because it has become aware of consistent malpractice across the sector. Security companies have been under the microscope for a while now, mainly because it is known that many of them engage guards as self-employed workers but the reality is that they are employees.


Medical practices, dentists and vets are targeted because they engage locums as self-employed workers whereas in reality it is nigh on impossible for a locum to be self-employed.

Professional footballers and their clubs have been under scrutiny for a few years now mainly because in some cases a player will receive a payment for the exploitation of his “image rights” and HMRC does not approve of this because it reduces or in some cases completely avoids liability to UK tax. HMRC appears to be feeling its way somewhat in this area contending in some cases that there is no such concept in UK law but in other cases seeming to acknowledge that image rights do indeed exist as a concept!

HMRC will be concerned as to whether or not an individual has the means to finance his standard of living. Information will be gained in this regard from a variety of sources, giving HMRC details of property owned, cars, boats, bank accounts, horses etc. There will often be perfectly sound explanations as to how such assets may have been acquired. I had one client who was investigated because HMRC drove past his house and saw half a dozen boats in the client’s drive. The explanation was that he was allowing fellow yacht club members to store their boats there during the winter, but it still took HMRC the best part of 18 months to accept that the enquiry should be closed without any adjustment.

Another client was the subject of a tip-off to HMRC by a neighbour who became somewhat jealous at seeing a new Porsche parked in the drive every other year. The explanation was again quite simple – once the first Porsche was acquired, it only cost around £20k to exchange it after 2 years for a new model, but again it took a full scale enquiry into the client’s company before HMRC would close the case down.

I knew an accountant who returned a net profit of £5k per annum and he was investigated by HMRC who saw a Rolls Royce with the accountant’s personalised number plate attached to the car! HMRC had a point!!

An on-going case concerns a client who HMRC insists has a number of caravans which he rents out. The information is allegedly from a “reliable source” but the client is adamant that he has only one, and the caravan park has confirmed this. There are no unexplained deposits in the client’s bank account and he lives a modest lifestyle with no indication that there is significant undisclosed income. There is also no indication as to how he could have acquired a number of caravans in the first place. We are now at a stage where HMRC either has to give an idea of where this information has come from or close the case down.

Some HMRC officers will scour the weekly adverts in the free local paper to see who is advertising their services and will then check to ensure that they are all registered with HMRC. They may check adverts in newsagents’ windows, in supermarkets and DIY stores with the same purpose in mind. Jealous neighbours, relatives and ex-wives will volunteer information to HMRC some of which may be malicious but some may be true and HMRC will usually investigate to see whether or not there is a case to answer.

I knew of a tax inspector many years ago whose 6 year old daughter returned home from a friend’s birthday party asking why she couldn’t go on holiday to Barbados like her friend. My acquaintance knew that the friend’s father was a taxi driver and the following Monday he checked the records of the girl’s father and opened an investigation because the declared profits did not support a holiday in Barbados and sure enough the business takings were grossly understated for a number of years!

So you can see from the above how HMRC can acquire information and use it to investigate a client. With experience it is possible to risk assess your own clients and at least address possible inconsistencies in advance of submitting self-assessment returns to HMRC. In this way explanations can be provided which may help to avoid an enquiry or the client can be made aware in advance that his figures pose a risk

HMRC Tactics

TAX SCHEMES


Are you tempted by the idea of signing up for a tax saving scheme?


Before you do, it might be worth reading the latest developments for those who took part in schemes based around film industry tax reliefs.


For many participants bankruptcy now looks certain, it seems. Full details are reported by the Daily Mail here.

Beyond the Original Investigation

NEW ENQUIRY POWERS


Ben Roseff, a senior manager in PWC’s Tax Dispute Resolution team, talks through the extension of HMRC’s powers in dealing with tax avoidance cases


Cashflow advantage shifts to HMRC


By now most people who deal with tax will have heard about HMRC’s new powers to tackle tax avoidance. The new accelerated payment notices (APNs) and follower notices (FNs), will be issued soon, so advisers and their clients need to consider their options. 


Why the change?


HMRC wants to discourage taxpayers from participating in tax avoidance schemes by changing the economics of the arrangements, through a requirement to pay the tax in dispute prior to any formal ruling.


What is an APN?


An APN will require someone who has entered into specified arrangements notifiable under the Disclosure of Tax Avoidance Schemes regime or who has received a counteraction notice under the General Anti-Abuse Rule to pay the tax in dispute to HMRC while the matter is under enquiry.  HMRC has published a list of 1,200 schemes where they intend to issue APNs. 


The APN will state HMRC’s estimate of the ‘understated tax’ and demand payment within 90 days.  If payment is not made in time a penalty of up to 15% of the tax may be levied.


What is an FN?


Where there has been a final relevant decision of the Courts and HMRC believes that the principles of that decision can be applied to the tax arrangements of other taxpayers, HMRC can issue a FN.


The FN will explain that the taxpayer may be liable to a penalty of up to 50% if they do not take ‘corrective action’.  The ‘corrective action’ will require the recipient of a notice to take the steps necessary to reach agreement with HMRC and withdraw from further litigation. 


Can I challenge the notices?


There is no right of right of appeal against an APN or FN. 


Written representations can be made, within 90 days, on the basis that the statutory criteria for the notice are not met or, for FNs, objecting to the relevance of the judicial decision. 


An appeal to the Tribunal can only be made against any penalty for failure to comply with the notice.


Where do these notices leave my tax planning arrangements?


An APN is essentially treated as a payment on account. Once any litigation of the planning is concluded the amount paid will either be set against the liabilities or repaid if the taxpayer succeeds. 


Recipients of an FN can continue to defend the tax planning through the Courts but if unsuccessful they face a penalty of up to 50% of the tax in dispute.  HMRC can assess the penalty after the matter is decided at Tribunal. In most cases the taxpayer will have to decide whether to take the action set out in the notice, without knowing the potential level of penalty.


The potential increased financial cost of unsuccessful litigation where a FN has been issued will fundamentally impact the cost/benefit analysis of continuing to defend the planning. 


What do potential recipients of APNs and FNs need to think about?


Any potential recipient of an APN or FN should seek advice about their options, particularly if it would create cashflow problems.


Although HMRC have been granted these extended powers, they continue to encourage taxpayers to settle any liabilities by agreement, and have offered a number of settlement opportunities for different types of planning. 


For many, the terms on offer remain more  beneficial compared to the outcome of a HMRC win at Tribunal. Given the new legislation and the impact on cashflow, any review of potential options needs to be carried out as soon as possible.


The original article was posted at :


http://pwc.blogs.com/private_client/2014/09/understanding-the-extension-of-hmrcs-powers-in-dealing-with-tax-avoidance-.html

Brexit UpdateBrexit.html

NEW HMRC ENQUIRY POWERS : Accelerated Payments and Follower Notices


The Finance Bill 2014 brought new powers for HMRC relating to tax investigations.


The new 'accelerated payments' means HMRC will be able to make taxpayers pay any tax which is in dispute - in advance of an enquiry instead of at the conclusion.


This can apply to taxpayers who have used a tax avoidance scheme and where certain other conditions are satisfied.


HMRC can now also issue 'follower notices' for cases of tax avoidance that resemble others currently or previously investigated. In these cases taxpayers will be required to pay in advance of an agreed final position.


Follower notices can be issued to taxpayers who have used an avoidance scheme which has been shown in another taxpayer’s enquiry to be ineffective. The notice tells the taxpayer they may be liable to a penalty of up to 50% of the tax in dispute if they do not amend their return or settle their dispute.


If the taxpayer wins their case, the money will be reimbursed with interest.


Elsewhere, there are new rules for promoters of tax avoidance schemes - they will be subject to conduct and monitoring notices, required to provide information, and can be “named and shamed” by HMRC.


Currently not included in legislation is HMRC's ability to remove funds directly from bank accounts. This is due to be included in the next Finance Act.