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Sub contractor tax enquiry

I will try to keep this short so please bear with me. Roughly 12 months ago HMRC opened an enquiry into the 2009/10 tax return of a subcontractor.  At that time my client didn't want to incur my fees to handle the enquiry so against my advice he took over dealing with HMRC.  The enquiry has been dragging on because my client has been ignoring the letters and then went to work overseas for a few months. 

When preparing the 2009/10 return he only provided me with 4 months worth of CIS vouchers.  He maintained that he has only worked for 4 months (very bad year), so the tax return was submitted on this basis, showing gross earnings of £3,780.  Anyway HMRC have since forwarded him a schedule of CIS vouchers which shows he worked for 5 months and earned £6,820.  He now accepts that perhaps he was wrong and that he didn't receive or retain all the paperwork he should have.

Last week he showed me the most recent letter from HMRC, which is asking for copies of all bank statements into which self employed income were deposited.  Having previously told HMRC that he was supported financially by his partner along with occasional monies lent from bank of mum and dad.  The letter also asks for details of what his partner earns and copies of bank statements from mum and dad showing where they lent money to their son.

My first reaction is to tell HMRC to bugger off as their requests are not reasonable to the enquiry.  Having read the all the previous letters from HMRC to my client I get the impression they are on a fishing trip.  I was just wondering if this was a client of yours how would you approach this enquiry with HMRC?  All thoughts/comments welcome.


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By PennyC
23rd May 2011 13:31

Yes and no

Having 'broken' the records - client has already admitted to not recording all income - I think it will be difficult to resist a request to see private bank statements. At this stage, I would offer them (if there's nothing to hide, that should not be a problem) but politely refuse the request for 3rd party documentation until Inspector has reviewed the private statements and can then demonstrate why further information is reasonably required.

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By bduncan
23rd May 2011 14:16

Happy Days

More CIS vouchers means more tax back.

Give the inspector your clients bank statements - the request is reasonable.

Your client has no right to his partner or mum and dads bank account so he cannot give them to the inspector.

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23rd May 2011 16:47


Surely it wouldn't take too much effort to get the income below the personal allowance so that nothing is due and your client gets a bigger refund.

If you have now been put in charge of the enquiry I would try and speak to the inspector direct. Explain that you are taking over and they should stop asking stupid questions to fish for information.

You can tell them where to go on the request of information from 3rd parties. I would also blank out the non-relevant entries on the bank statements. 

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By SteveOH
23rd May 2011 18:01

I have to say that I feel that HMRC requests ARE reasonable

The subbie has, carelessly or not, omitted about 80% of his original income from his Tax return. So he needs to do some work here to convince HMRC that his new figure for income is correct and to mitigate any penalties. Without having seen the correspondence from HMRC, it is impossible to say; but I doubt if this is a fishing trip. I think that they just want to determine the tax liability.

Given that the enquiry is about 1 year old, I am surprised that they haven't already asked for his bank statements. He should deliver them immediately and have explanations for any deposits other than his CIS income. It's not sufficient for him to say that, for example, £2000 of lodgements during the year constitutes money given/lent to him by his parents. A copy of their bank statement (with other entries blanked out) would seem a perfectly reasonable request.

Regarding their request for "details of what his partner earns", it depends what they mean by details. It may be that his partner pays the rent/mortgage and all the household bills. In which case it may be that HMRC just need to be sure that the partner's income would cover this.

There is then the question of expenses that the subbie would have had to incur by virtue of the extra month's work. I doubt if he has any receipts so it may have to be a question of HMRC agreeing to a reasonable estimate.

I think that this is a salutary lesson to your subbie client. He may have made a short term gain but he is certainly going to suffer long term pain.

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23rd May 2011 21:45


I disagree that HMRC are fair in asking for a relative's bank statements.

Considering that they often bang on about Data Protection, client confidentialilty and all that, they are not entitled to see such 3rd party records; only those which pertain to the client (ie perhaps a legal agreement, IF THERE IS ONE) from his side only.


Regarding the partner's income or contribution, this can easily be proved by receipts to his bank account. Again, no docs in the partner's name, without their specific consent should EVER be given to HMRC.

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By SteveOH
23rd May 2011 22:08


I absolutely agree with you. No third party documents should be shown to HMRC without said 3rd party's consent.

And regarding the parents' bank statements, I should have phrased it better. It is not right that HMRC should say they want to see them; more that they might suggest the subbie ask his parents for permission to show them to HMRC.

The point that I was trying to make was that, due to the fact that the subbie has made a fairly significant error in his Tax Return, the onus is on him to produce evidence to minimise his tax liability, penalties and interest. He does not have to cooperate and he does not have to show, even with their permission, 3rd party records; but if he doesn't cooperate then HMRC will simply treat all deposits to his business and private bank accounts as business receipts, unless evidence obviously points to the contrary.

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23rd May 2011 22:20

I agree he should co-operate on his own front, but without dragging someone else into it. He should be able to prove his loans from his own records, thru other means than showing his relative's bank statements, with or without his consent.

I take your point about the income assessable on the client and I would review the statements, prepare a schedule therefrom and submit that to HMRC saying you have reviewed the relative's statements but due to confidentiality, on a person you do not act for, you cannot give them the actual statements or copies thereof.

Wven then I would only ever use the bank statements themselves as a last resort when all other avenues have been exhausted else you leave the relative vulnerable too and your client will like you even less! Only then after very, very careful consideration and editing all all other irrelevant info, so a fishing expedition can then "encouraged" on the said relative.

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By SteveOH
23rd May 2011 22:32


I take your point.

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24th May 2011 09:21

I have nothing to add except to say...

that it is horrifying that the revenue feel this is a good use of time and money - a simple letter advising that they believed that income had been underdisclosed and ask for acceptance of this fact probably would have dealt with this matter in a matter of days.  What a complete waste of everyone's time.....and for the event probably a small tax repayment.










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01st Jun 2011 12:56

The Compliance Factor

I am old enough to remember the Revenue case against Ken Dodd. Whilst I think that it is generally accepted that KD acknowledged his guilt and made an offer to them in settlement, no pre-court deal was struck. Instead HMRC wanted public ‘bloodletting’.

Subsequently, KD was equited by a jury.  (so the UK legal system is not perfect, after all)The reason why the Revenue wanted to go to court was to scare the ####s off other taxpayers, so that they might reconsider ‘their ways’ and be more ‘compliant’ in the future. In that case it backfired on them and KD became something of a folk hero as a result.Lester Piggott wasn’t so lucky and Customs & Excise obtained their public ‘bloodletting’ in full by LP serving a prison sentence for VAT fraud.So, don’t always assume that an Enquiry into an individual’s tax affairs needs to be cost effective insofar as that individual is concerned. Ripples on pond and all that!

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02nd Jun 2011 10:30


Hi Chris

In a Full Investigation I defended a while back, my client opened up their personal account to HMRC because they were banking cash received there to avoid bank charges. This then revealed other sums being deposited.


However, HMRC did accept formal statements from relatives who had lent money giving dates and amounts, avoiding the request for anybody else's bank records. The wife also had a job and we copied her P60 (which she was legally bound to keep for 7 years - as are we all) and gave them that as proof of her income and their combined ability to pay their living costs.


I agree that having failed to declare 80% of his income that HMRC could prove, they would then be reasonably suspicious that your subbie was doing cash in hand jobs with the general public that he had not declared and that they are reasonably entitled to seek to gain the proper amount of tax from.


Last time I did an Investigation, the rules on penalties were up to 6 x tax (and NI, I think, but please check) owed. Made up of 3x assumed for the same mistake in the previous 2 years unless you prove otherwise. Up to 2x tax owed for how quick, amenable and forthcoming you / your client have not been.

So my advice would be to

1 Prove partner's income

2 Get signed letters of loans

3 Disprove the 2 years before between you and your client, then submit that to HMRC with

4 An offer just above the tax and NI owed and see what happens.

Don't forget HMRC give their Inspectors bonuses now based on performance so they are keen to get it over with and move on to potentially bigger fish.


Ann Dartnall

abacus 161 Ltd

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02nd Jun 2011 11:45


You are assuming that the Subcontractor is telling the truth.  HMRC are unlikely to pursue anyone for peanuts like this - perhaps they know something that we dont?  Has this man admitted in interview that he has holidays, runs a car, gambles, eats out a lot, has a mistress even etc etc.  If he has, the pittance that he has admitted to does not cover his expenses.  If he doesn't come up with evidence of documentary loans/evidence of support he may well be assessed on the income required for his lifestyle.  It is dangerous to have a taxpayer represent himself and then ask an agent to take over as the agent has not, nor will, see the Note(s) of Interview.  I suspect he saw a "really nice Inspector" who talked about the weather and how he'd like to be abroad in the sun(:-).  The taxpayer then said he would love to be in ?timbuctoo? and the Inspector would have said  that he liked it there too, had been there x amount of times and, in a round about way, ask how many times the taxpayer had been there, last visit etc.  Wham - he's got him.   

Me cynical?  No, just a good interviewer who could sneak up from behind!




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