Tax investigation - Can they do this?

Tax investigation - Can they do this?

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I have been approached by a friend who is currently in the middle of a tax investigation.

As I have no specialist knowledge in this area the first thing I have suggested is that he get good specilist advice as the potential tax could be quite large.

He, rather stupidly, had a number of bankers drafts made out to a friends company, and then was repaid in cash a few weeks later for each one. There was only one outstanding each time which was repaid before another was drawn. It eventually turned out that his friends company was importing drugs and that he had inadvertantly been laundering a small amount of the proceeds (totalling appoximately 100k). He was arrested, investigated, and no charges were brought. HMRC are now looking at the transactions and are stating their opinion to be that the bankers drafts drawn will be ignored, and the cash paid in will be classed as income and taxed accordingly. They have apparently openly stated that as the other party is now dead and cannot backup his story then he can't prove it isn't income and therefore it is taxable.

Can they just ignore his payments out? Surely if money in is to be "deemed" income, then money out should be "deemed" expenses. Also the fact that the other party isn't around also serves to say that they cannot disprove his version of where the cash came from. The evidence would certainly back his story rather than theirs?

Finally, would any of you be interested in taking on the case, or be able to suggest the best place to go?
NH

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By martinfoley07
11th Feb 2009 09:30

blimey, NH, .....
...next time you meet the guy for a dronk, take him to one side, look him in the eye, and say
"Now Bob (or whoever), you were telling me the truth, the whole truth and nothing but the truth when you assured me that you banked every last one of those lovely used bank-notes you took from the now deceased drug importer, weren't you. And you did not inadvertently (great word) forget to bank some of them and keep them, perchance?"

Actually, on second thoughts, I would not advise you do this.

Of course if the plumber did happen to recover from his amnesia, admit his retention of say 30% of the used bank notes he received, and belatedly declared this as taxable income, perhaps HMRC and the Commissioners would accept the story on the civil balance of probabilities argument.
That's a good way of counter-arguing HMRC's position and reducing his tax exposure.

Unhappily, it may not do much for his stance on the criminal burden of proof case. Ah well. Can't win 'em all.

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By User deleted
11th Feb 2009 08:39

agreement
Martin

I like your description of the circumstances, it made me laugh whilst being fairly accurate. I didn't mean to suggest plumbers were less savvy (though I did clearly imply it) I just meant to highlight that money laundering is a mystery to a lot of people and lots certainly wouldn't initially understand that these transactions are plainly laundering transactions.

David
I fully understand what you are saying and if I'm honest its one of the reasons I don't intend to get involved other than to point him in the right direction and walk away. I do find the whole situation very interesting though.

The variety in friends comes from living in a small town where most people consider others from the area as friends. Perhaps a better decription of his relatinship to me would be "acquaintance" or "some bloke I've had a dronk with in the local a few times".

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David Winch
By David Winch
10th Feb 2009 23:33

This may seem harsh

NH

This may seem harsh but I would strongly suggest that your friend becomes an ex-friend and you do not touch this with the proverbial barge pole.

Your (ex) friend has got himself involved with serious criminals (whether innocently or not, deeply or not, it does not matter). You have no need to do likewise.

You say, "The fact there were no charges brought for money laundering would seem to indicate that the police or potentially the CPS belive he is genuine, or at least have no evidence to prove otherwise." Big mistake, NH. It is just as likely that the police had other priorities (bigger fish to fry) or simply that it would clutter their investigation to pursue too many prosecutions at once. They will be thinking they can get him next time he does it.

Pass by on the other side of the street - this is no time to be a good Samaritan. You are in no position to help him. Give him the names of a couple of good accountants and walk away.

Do not pass 'Go'. Do not collect £200. Do not believe anything your (ex) friend tells you. The end.

If it helps, console yourself with the thought that your (ex) friend is a lucky man if he only has the taxman on his tail.

David

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By martinfoley07
10th Feb 2009 23:10

NH.........
...........only you can know what parts of the story (as known to you) you are prepared to share with us.
Only your friend can know what parts of the story (as known to him) he is prepared to share with you.

(at least he has a variety in his mates ; you and a dead drug importer!!)

So we cannot hope to bottom the matter on a blog.
But (without saying your plumber friend did or did not know what was going on - only he knows that) I would leave you with the thought :
how many folk ( including "plumbers" - who you seem to imply are less savvy than accountants and lawyers - I don't agree. Let's not confuse intricate legals and high finance with savvyness ) would
"......increase his mortgage to renovate his house", and then apparently, instead of using the money to renovate his house, think it a great idea to use the increased mortgage to lend the money , via a bankers draft, to a mate. What a great idea, what a nice chap. Then, when he gets repaid in cash, would carry on repeating this harmless little trick (aka short term loan, apparently - I suppose that sounds better) many times.
And all for a bit of plastering and building work on the side.
Yes, any plumber I know would jump at the chance to raise a mortgage on his house, on-lend the money to a mate via a bankers draft, get the money back in used notes, then repeat the process many times, so that he could land a modest plastering/building project.
Only we clever accountants could have the wisdom and street-wise skills to understand that a higher rate of financial return was required than "some plastering and building work". Mere plumbers could not hope to see that. (er, remind me how you know there was no higher return?)

I hope your friend has the luck that he deserves. I mean that sincerely ; if he deserves good luck, I hope he gets it.

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By User deleted
10th Feb 2009 19:56

thanks all
Penny
Thanks for your comments.

Martin
The reason I used the word inadvertantly is that all he thought he was doing was providing a short term loan to a friend. Of course once this was paid back on time the first time, he was willing to do it again and again.
The fact that to an accountant, a criminal or anyone involved with the legal system this would highlight an obvious way of laundering money, does not mean that it would be so obvious to your average plumber who is just helping out a mate. The only gain he got for providing this short term loan was some plastering and building work done on the house he was renovating at the time.
The fact there were no charges brought for money laundering would seem to indicate that the police or potentially the CPS belive he is genuine, or at least have no evidence to prove otherwise.
I would agree with you regarding matching in most cases, however in this case where the lack of evidence is through the death of the other party, it seems harsh to disregard the outgoings completely when it can be proven where they went.
As for the concern for the amount of tax, as he was not a party to the proceeds of the drugs the tax due would be a relatively large amount to him (espescially considering his only gain was a bit of building work on his house). The reason I describe 100k as a small amount of the proceeds is that the estimated total street value of drugs brought in throught this company was in excess of £500million and although I may be wrong, I would imagine the profits on that amount to dwarf the 100k.

David
I agree with you that he is lucky to have avoided a prison cell, however as I said above things that are obvious to us are not as obvious to others.

Jeff
The investigation did originate after the criminal investigation but has been described as random. Originally it was into the 2004-2005 tax year where there were no transactions of this kind. HMRC then requested his bank statements for 2003-2004 which threw up this problem.

The money he had in the bank to make the original loan came from an increase in his mortgage to renovate his house. Each time the repayments either matched exactly, or were slightly short as he had used some of the cash to pay for materials for the renovation.

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David Winch
By David Winch
09th Feb 2009 23:00

Not much help, but . . .

I only take criminal cases (including High Court cases under Part 5 of PoCA 2002) - as this chap is not being prosecuted (and presumably is not subject to PoCA civil recovery proceedings) it's not my scene, man!

Personally I think this chap - who apparently helped launder £100,000 of drug money - can count himself lucky he is not facing porridge, and confiscation to boot!

David

P.S. You could try contacting Tony Borman at BNB Tax in Birmingham
www.bnbtax.com/BNB-tax-team/tony-borman.asp

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By clive griffiths
09th Feb 2009 21:03

Try...

Tony Monger in London. He may be interested in taking a look at this?

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By User deleted
09th Feb 2009 18:32

Somewhat off the point but....
I found it amusing that Martin Foley was one of those responding here.

Have a look at another (?) Martin Foley who might be interested in these transactions for other reasons:

http://www.rte.ie/news/2008/0126/dublin1.html?rss

Bradley H.

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By martinfoley07
09th Feb 2009 18:00

"small amount of the proceeds "....
....so why concerned that "potential tax could be quite large".
Can we define small and large?

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By martinfoley07
09th Feb 2009 17:47

great word.......
........."inadvertantly ".

Just what did your "friend" think he / she was laundering exactly? Guns rather than drugs?

Just when you need an antidote to the stupidities and burdens and headaches of POCA, you get one like this. Ah well.

As Penny says, take your chances with the Commissioners.
As she says, they will conclude on civil law probabilities and not criminal law burdens of proof.
(doesn't remotely guarantee you'll get the answer you want, by the way).

David Winch doesn't take such tax cases (I think - apologies if wrong, David) , but he may know many that will.

p.s. HMRC is not of course obliged to match monies in with monies out. Thinking about it for 2 seconds should tell you why.
As for their stance that we'll assume unless you show otherwise that money in is taxable ; that is common enough.
Similarly their stance that we won't allow money out unless you show it's deductible is common enough also.
It can be really irritating in genuine cases.
Not sure whether I'm too sympathetic as to whether your "friend's" case is genuine or not. Well, I am pretty sure. Was any "cut" involved for this laundering service?

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