Tax investigation support
Written by Ray Coman
Scaremongering is a common tactic used by accountants to draw out fees from tax enquiry services and even tax investigation insuance. We do not promote tax investigation insurance. We share our clients desire to avoid unnnecessary time and effort on a tax enquiry and do not try to create tax investigation work at the client's expense. Nonetheless, a tax enquiry can be long and drawn out process, sometimes lasting for years. It is intrusive and potentially stressful. The cost of the disturbance to the client and the client's business could be high. HMRC may demand extra tax relating to events long past, even though the taxpayer may no longer have the cash available to pay it. It is therefore advisable to get professional support at the earliest opportunity. We are not judgmental. We respect confidentiality. We also respect HMRC, and aim to be courteous and succinct. Part of our job as tax adviser is to help clients through an enquiry. We want to be fair in our pricing. Keep the experience for our clients as painless as possible in the hope that we can move onto to brighter tax work in the future.
HMRC can start an investigation for any number of reasons. They may believe more tax is due because of a tip off or because the information on a Tax Return does not correspond to other information that they have available. They also select taxpayers for investigation entirely at random. There is, therefore, nothing anyone can do to eliminate the chance of being investigated. However by appointing us as tax adviser our clients can help prevent the investigation resulting in tax and penalties which are not due. Estate agents, trade associations and AirbNb are often required to disclose their clients, landlords and members to HMRC. Anyone can report tax evasion to HMRC, such as an ex-wife or ex-husband, a disgruntled employee or competitor.
Simple adjustments arise because the Tax Return did not include: a source of employment earnings, benefit-in-kind (such as private medical insurance), student loan repayment, repayment of child benefit (know as the High Income Benefit Charge.) These adjustment arise because the information automatically sent to HMRC by a third party does not match the information on the Tax Return, by reference to national insurance number.
Authentic looking messages advising of a tax refund are often sent by scammers to people's emails. An HMRC account can be used to double check any messages against the online record to confirm its credibility. The "personal tax account" allows the user to view a history of tax filings, payments and liabilities. We are regularly asked by our clients to check the authenticity of messages in which the sender purports to be from HMRC.
HMRC tax enquiries often result from participation in a tax avoidance scheme enabled by a Promoter of Tax Avoidance. Examples include:
Film Partnership, in which the taxpayer obtains tax relief through being partner in a sham film production that is designed to generate a loss.
Disguised remuneration, in which pay is routed through an umbrella company in the form of a loan and therefore avoids PAYE tax.
Various schemes in which employment earnings are routed through an offshore entity, located in a low tax jurisdiction such as Isle of Man.
Failure to disclose income, through being a landlord, sole trader, business owner, beneficiary of a trust or as an investor in UK or offshore funds.
The general rule is that a UK resident is liable to tax on worldwide income and gains. UK residency for tax purposes is determined by days of physical presence. Liability of a company to corporation tax is determined by central management and control. In effect, a company which is owned and/or managed by a UK tax resident will be liable to UK corporation tax regardless of where it is incorporated.
If there has been an error or omission in a Tax Return, penalty for late notification to tax is a percentage of the tax lost. The percentage is determined by whether:
- The disclosure was prompted or unprompted by HMRC. A voluntary disclosure will be subject to much lower penalty.
- The omission arose as a result of carelessness, or a deliberate attempt to evade tax
- If deliberate, steps were taken to conceal the evasion
- The misstatement occurred within 12 months of the most filing date. A higher percentage applies for older omissions.
- Penalties can be reduced for co-operation with HMRC through a prompt and complete disclosure.
The Requirement to Correct Rule was introduced by the Finance Act 2017, and made it necessary for anyone with undeclared offshore income and gains to report this to HMRC by 30 September 2018.
If HMRC have sent a letter about “overseas assets, income or gains” any subsequent disclosure will be regarded as prompted. The penalty for not telling HMRC about offshore income and gains is a minimum of 200% of the undisclosed income. In practice the penalty amount can often be reduced to 100%.
HMRC has one year from the date of filing of a Tax Return to raise an enquiry. However, HMRC post is send second class and therefore in practice, allow fourteen months for the tax enquiry window to close. Consider in the case for instance of overseas income and gains or a tax avoidance scheme that an enquiry into one year could open up an enquiry into preceding years in which the circumstances were the same.
HMRC can raise a ‘discovery assessment’ on finding information that was not previously available to them at the time the Tax Return was submitted. The time limit for a discovery assessment is 6 years in the case of carelessness and 20 years in case of a deliberate attempt to evade tax.
Some accountants offer their clients an insurance that will cover the cost of fees in the event of an HMRC tax investigation. We do not believe that this kind of insurance offers value to our clients. The probability of a tax enquiry is relatively low. We aim to assist our clients in bringing the enquiry to a prompt settlement and avoid an argumentative approach with HMRC. Our fees competitively priced and, in our opinion, the cost of an enquiry is lower than the cost of investigation insurance over the long term.
We have wide experience dealing with tax investigations and our services include:
- Carrying out all tax work to the highest standard to reduce the likelihood of an enquiry in the first place.
- Identifying problems with internal control procedures that result in errors which may lead to an investigation
- Providing practical advice on reducing the risk of future system errors.
- Advising on the likelihood of HMRC challenging any tax planning.
- Negotiating with the tax authorities on behalf of the client.
- Dealing efficiently with all HMRC correspondence to bring any enquiries to a prompt close.
- Examining the tax enquiry in detail to ensure the client does not pay more tax than needed.
- Managing all aspects of the tax enquiry so our clients can concentrate on running their business.
We aim to give our clients complete peace of mind. We try to get promptly to the point about what is owed. We draw on practical experience and thorough research to provide credible advice about any aspect of the enquiry which is worthwhile challenging. We deal with HMRC on behalf of our client to focus on technicality and use appropriate and relevant language. For our clients, let us hope not a penny more than necessary paid in tax and in turn for a more prosperous future.