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How do I combat this particular Inspector......my longest ever running Investigation

I have had an investigation running for some two years, mainly as a result of my client being unable to provide copy building society account statements - the B.Soc in question admitting that the records had been lost.

Lo and behold, when the statements did appear, there were 'unexplainable' bankings of around £6500, together with his car sale proceeds and board/lodgings money received from his son.

I made the client aware that anything he could not explain would have to be assessed and most likely back dated over a number of years.

I spoke to the Inspector, who freely admitted my most recent letter had sat on his desk for six weeks. Two days later I received his proposed amendments to which I did not know whether to laugh or cry. The stated net income had been uplifted from £14,000 to £42,000 based on what was described as 'all unidentified bankings into the Building Society'. All other aspects of the enquiry were concluded.

When I rang him to point out that his list of unidentified bankings actually included £20,000 of inter-account transfers (to accounts he had already inspected) plus the car sale and housekeeping monies - I gave him the opportunity of redoing his paperwork rather than waste my/my clients time based on such nonsense.

When I rang this morning, he now states that they have changed their minds and will be reassessing based on a 'business economic model' that states that a 40 year old builder with children should be earning £200 a day in labour.

How can I combat this man's approach? He is intent on assessing my client by hook or by crook on over £40,000 net income when the true figure even after including the ommissions, is around half that.....

Client has admitted his records were incorrect, but the Revenue are now seemingly using this as a reason to assess him on arbritary amounts that bear no relation to reality.

I would be grateful for any assistance....yes the client has errored, but he was willing to top-up his mortgage to pay all back taxes. If the Revenue succeed in their approach it will bankrupt him.

Paul Evans

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By Anonymous
30th Aug 2006 20:17

A few suggestions
There is good judicial authority for coming to the conclusion that all years are wrong if one year is found to be.

However, we all know inspectors are very reluctant take cases to the Commissioners as it creates a great deal of work and this Inspector sounds lazy.

A few suggestions:

Why not review BS statements for the previous year. If nothing wrong reveal this to inspector with a view to muddying the water. Argue the problem was a one off if you can.

Find out what the client can raise. Use this to pursuade the inspector to accept a negotiated settlement. They are allowed to consider means when settling a case and unless you withdraw cooperation formal assessments and formal penalties are unlikely. The inspector will want to agree a contract settlement at all costs.

You need to get this inspector to toe the line and stop causing delay. Politely draw his attention to COP11 and ask his to reply to letters within 15 working days or else keep you informed for the reason for delay and the date a reply will be made by.

Under the Freedom of Information Act request a copy of this 'Business Economics Model' and see if you can distinguish this from your client's case. £200 per day seems a little high. If the inspector has misled you use this. If will not look good to the commissioners if the inspector has misled you.

If the inspector persists with his stance write to the Clerk to Comms (not the inspector) asking the case be listed for a hearing as to whether a Closure Notice should be issued and sit by the phone. My guess is the inspector will spring into action and try and reach a deal.

Get the client to make a payment on account no matter how small.

Argue you will not accept anything more than a 25% penalty. Rumour has in the tax press that this is what HMRC accepted in the David Mills case. He's a rich corporate lawyer so why should your builder client pay more?

Hope this helps.

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31st Aug 2006 10:04

Steve is absolutely right
Follow his advice - you cannot do any better.

The key here is to be "reasonable". If and when you go to the Commissioners, they are much more likely to take a "reasonable" point of view.

However it is extremely unlikely it will ever get to the Commissioners. Once you have informed HMRC that you wish a determination to be made against which you will appeal, the case will be reviewed by the Inspector's manager. If it is listed for appeal, it will be reviewed again by the appeals inspector.

Commensense is likely to prevail, especially if you have made a reasonable proposal to settle.

HMRC really do not seem to like going to appeal these days. Use that to your advantage.

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31st Aug 2006 09:56

You might also...
Draw the Inspector's attention to the Farthings Steak House case (Scott & anor. v McDonald), wherein the Special Commissioner criticised the Revenue for (inter alia) relying on a variety of business economic models which bore little or no relationship to the genuine facts of the case.

I think steve has missed the point slightly: the Inspector has already issued closure*; the point about which you can and should appeal (as steve says, direct to the GCs' Clerk) is the quantum of the amendment under s.28A(2)(b). Unfortunately, an appeal on this issue is unlikely to galvanise the Inspector to rush to the phone and compromise, and so you may still face a slog...

* the fact that he has proposed amendments implies that he has either already issued a closure notice compliant with s.28A(2) or is in a position to issue one, so appealing under s.28A(4) would get you nowhere.

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By Anonymous
31st Aug 2006 16:17

Drastic action
The inspector may well hearken to reason. He or she may not. If so, one needs to assemble all the defences one can, as did Mr & Mrs Scott in Farthings Steakhouse. If necessary, engage a specialist tax investigations consultant who will take a 'hawkish line' with the inspector. The idea of engaging a solicitor expert in criminal matters to represent the client before the (Special) Commisioners is not a bad one. Remember that HMRC do not like cases coming before the 'Specials' as the case will be publicised. You may be dealing with the 'rogue' tax district that has come to my attention in recent months.

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By Anonymous
31st Aug 2006 20:43

me again
I'd be surpised if a Closure Notice has been issued. Took Paul's comments to mean only proposal had been made to him alone.

If no CN has been issued Paul can force one by asking the Clerk to list the case for hearing as to whether the Inspector should issue one. The Inspector will still come running to the table.

Don't really agree tax case qouted is that relevant. In the case referred to the Inspector was criticised as he relied alone on business economics to crack the case. It would seem it is already accepted there are problems in the case of this client.

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31st Aug 2006 21:35

I'm sympathetic, paul,...
...but there are elements of a reality check on BOTH sides here. (although I appreciate we don't have every detail at our disposal)

The delays were primarily caused by lack of Building Society records, not by HMRC. Sounds as if you, the client AND HMRC might have all got fatigued by this drawn out process.

HMRC has been guilty of (i) sitting doing nothing for two weeks (ie 6 weeks less 4 weeks) until chased by you (ii) switching tactics for no apparent or explained resaon (iii) being less than scrupulously detailed in computing excess bankings.

Your client appears to be agreeing he is guilty of pretty significant under-declaring (14k declared, 6.5k undeclared?)

On HMRC deficiciencies, (i) is irritating but hardly terminal or even unusual - doesn't make it acceptable, but I personally find it a useful negotiating lever when HMRC have been slow and caused unnecessary delays
(ii) is irritating, but has to be addressed
(iii) will frankly often happen - quite rightly we throw back at HMRC fact that they are supposed to be neutral and assess the "right" amount of tax, but ... You said why should I waste my time and my clients in going through it - perhaps HMRC attitude was the same in reverse.
Have you explained your version of net £6,500 undeclared/unexplained income? If not, why not? Isn't that saving time rather than wasting it?
No good (in my view, on tactics or reality) to "give HMIT the opportunity of re-doing his work" - you 've done it, share it with him. It works for your client.

Assuming you get to persuading HMRC that £6.5k is the extent of the problem (and there I am largely with most of the suggestions made below) then you MUST consider how year under enquiry was different from previous years, else it is not difficult to envisage HMRC saying that all years are understated by £6,500 and you having to prove otherwise.

On combating the changed tactics, I have never accepted HMRC business economic arguments - they are just crass and useless to HMRC on specifics (as case specified pointed out, but 'twas ever thus and will always be so unless legislation is passed to let them do this). But there is a crack, as pointed out by Steve, where there are fundamental recording deficiencies proven. To my mind, however, that does not negate the principle, and you will just need to stick with the FACTS, but as you present them, not as HMRC presents them.
This does mean work, I'm afraid and, based on objective view, I do think it unrealistic to assume HMRC have to do all the work where clients are acceptng they have underdeclared.
You have been put in the position where you have to demonstrate your analysis of £6.5k is correct. If you have done so, go to Commisiioners now (with expert help if need be). If you have not done so, do it now in a simple letter with back up, then go to Commissioners.

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