HMRC Investigation

HMRC Investigation

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At the beginnng of 2005 I agreed to help a new client with what an HMRC Enquiry. A brief summary of events is as follows:
Before I started to act, HMRC met with the client who explained the position regarding that he had been a Director of a Ltd Company that was now dissolved. The company incorporated in 2001 and was dissolved at the end of 2003. In the running of the company, my client was responsible for paying some subcontract persons (not construction industry) and then reclaiming the monies from the company. Most of these amounts were paid to subcontractors in cash and in order to cover his back our client took full details of each person and passed the details together with a list of amounts paid to the company. Unfortunately he did not retain a copy of these records. My client used his personal bank account to receive cash from the company and withdraw cash to pay subcontractors. My client's co-Director at the time maintained the company records and my client was not involved in that part of the running of company. My client was effectively the sales force co-ordinator whilst his co-Director was MD and FD.
The company was dissolved because it was not profitable however HMRC are now looking at the entries going through my client's personal bank account. There are lots of large entries and lots of cash withdrawals and without any evidence of the amounts paid out HMRC are trying to deem that all of the receipts from the company are untaxed income.
My client has not seen the co-Director for a number of years and he has not been able to contact him at his last known address (which my client gave to HMRC at the initial meeting). It now transpires over a year later that HMRC did not make any attempt to contact the co-Director for the company records and within the last few weeks my client has discovered that the co-Director has died and there are no records available.
A further complication is that my client used his wife's bank account on occasions to pay the subcontractors and then recover the amounts from the company or from his account. So we have another batch of amounts received to her account without any evidence of the amounts paid out to subcontractors.
To top the lot the HMRC officer insists on writing in a very muddly way without any form of question numbering and hardly without paragraphs or sections - this makes replying and referring to the HMRC queries raised very difficult indeed and despite having pointed out the difficulty and asking HMRC to use numbering of questions, muddly letter follows muddly letter.
My client's health is deteriorating fast and the stress due to this pending huge tax liability in a long drawn out investigation is having a severe effect.

With apologies for the length of my explanation I was wondering if others have had similar problems and if so, do readers feel that the client should just roll over and agree the tax liability as he does not have any evidence to vouch the amounts paid over to subcontractors?

I had wondered whether the responsibility of the tax would fall to the company (which obviously has no funds and no longer exists) but HMRC are saying that the tax and NIC can be recovered from the Director under "Regulation 72 (Income Tax (Pay as you Earn) Regulations 2003)".

Finally, my client and his wife have both been asked to sign carte-blanche bank authority forms for HMRC - my client and his wife are happy to do so as they have nothing to hide. HMRC say they may consider an application to the General Commissioners for authority to serve s20 notices on the bank if the authorities are not signed. I guess therefore my client and his wife has no option. Any comments?

Any feedback will be gratefully received.

Antony

Antony

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By martinfoley07
12th Sep 2006 21:30

well, there are quite a few....
... points, Antony. But impossible to make many useful comments without a lot more information, including background.

First off, what WAS the company's business? (you don't say other than it was nor construction industry).
Secondly, why were the sub-contractor payments all in cash? How much was involved and does it seem remotely reasonable?
Thirdly, why was the director paying the sub-contractors from his pocket, and not the company paying them direct?
Forthly, why was there no contact between your client and the other director prior to the latter's death?
Fifthly, were any accounts ever submitted? In which case, have no records thereof been unearthed from the other director's affairs? How does your client know there are no records?
Further, were these two also the sole shareholders?
And as regards the payments made, can your client not recollect the details of any of the sub-contractors? If that was his side of the business, where did he source them from? Can that not help to substantiate some payments and so make inroads into the pile of outgoings?

Subjectively, is it the view/belief that your client is merely naive (even if awesomely so).
And that his fellow director was also merely naive (and presumably more careless than your client if all records, including data on the subcontractors, have disappeared).
Or worse? Do HMRC have nothing to say about the co-director?

All these are issues you must have considered over the last 18 months or more, and will surely impact your strategy?
Obviously the whole thing can be entirely innocent, and in that case the whole situation is really unfortunate for your client (impossible to say it is bad luck, since it clearly is not).

It is certainly not HMRC's job to write muddly letters, yet they can certainly manage to do so !! It is your job to control the question/answer process so that it is not muddly, by re-organising and re-arranging their points if necessary. Not sure if this helps or not, but often it gets muddly where HMRC officer is not very good, or the case is getting out of control from their side. You can bring this to a head frequently by pulling back from minutiae and going "back to basics". But that may not be great in your case, as the basics are - demonstrate the cash outgoings are genuine business expenses which, for some as yet unexplained reason, were being paid out of the personal accounts of one of the directors and his wife.

I go through all this since it sounds as if, without some satisfactory progress on those matters, you are left with little but to "threaten" going to Commissioners with the best presentation of the clients case, and hoping for a deal based on probabilities - and perhaps using that as a lever for a better negotiated settlement. If your client is not considered an out and out con-artist by HMRC, they are likely to negotiate something here.

If the sums involved warrant it, you and the client may need to get expert help.

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