Tax zone
Feature
Tax investigations: The taxpayer's story. By Nichola Ross Martin
Do taxpayers whinge too much about HMRC's investigation tactics? Nichola Ross Martin looks at the issues.The Sunday Times recently published "The 10 things you need to know about tax investigations." It was a list was compiled by an unhappy “customer” of HMRC, called Nick Morgan following a two year tax investigation into his self-employment as a journalist. He was dismayed to find that tax is taxing and complicated (despite the ad campaign, which is alive and well and still playing regularly on local radio stations). He was then caught out by what seems to be a combination of lack of familiarity with HMRC’s investigation tactics and the discovery provisions in s 29 TMA 1970.
Mr Morgan’s “need to know” list (abridged by me) is as follows:
- Tax is not simple
- Stick to your guns (i.e. don’t be negotiated downward)
- An enquiry into one item (an "aspect" enquiry) on your return can escalate into a full enquiry (covering all your income from all sources)
- You are guilty unless you can prove otherwise
- The interview is a trap (HMRC like to interview taxpayers to find out more about their circumstances)
- The lifestyle questionnaire is given for a reason
- Investigations takes time
- The complaints team is an arm of investigation
- HMRC doesn’t tell you about the power to scale back (discovery provisions and penalties)
- HMRC is getting more power.
Most tax agents will not be surprised by any of these, and it is worth discussing some further and looking at the taxpayer's lot in general.
Tax is not simple…but the internet does not help
Tax can be very complicated as well we know. The taxes acts are now over 10,000 pages long and so the actual statute combined with the enormous volume of material available internet (including HMRC’s manuals) means that your average tax partner in practice has a job keeping up-to-date. A taxpayer doing a search on expenses on google is more likely to hit a reference to HMRC’s Employment Income Manual. I always thought that the paragraphs on lorry drivers and stable lad’s subsistence were particularly dangerous to the untrained brain and then the rules changed on employee travel too. In the blinking of a cursor a generation of self-employed taxpayers came to misunderstand the rules on lunch.
So, in terms of the real basics –“What can I can’t I claim”? Tax is most definitely taxing and the world wide nest (sic) has made it more, not less, complex.
Stick to your guns…HMRC investigation tactics
Mr Morgan lists (2 to 5) all the common “traps.” It does seem harsh to find that you may have entrapped yourself by giving an unplanned off-the-cuff answer – all in the spirit of cooperation. The interview and lifestyle questionnaire really do need a health warning; who in their right mind accurately records their private expenditure on a year by year basis?
Lots of people say that it is not fair that inspectors try to catch them out, but it does so much depend on the facts of the case, not everyone is a saint, you know. A business will be continually targeted for enquiry if it has record keeping problems or has unusual trading results. Persistent loss claims may make you a brighter dot on the radar too, but this is surely understandable. If you have claimed legitimate business expenses for tax, then you will obtain full tax relief. If your expense claims are not valid, or you are unable to provide evidence that you incurred the expenditure then the law (as in past tax case law) is against you.
Record keeping requirements may be set by HMRC in the future. A change in the new Finance Bill has potentially quite an interesting bearing on investigation cases. In theory, if everyone did keep the sort of records that HMRC perhaps would like them to keep (and happened to be good at bookkeeping too) then some of HMRC’s tactics would no longer be of any use.
Penalties and discovery
HMRC do publicise tax penalties from time to time, but you need to tune into local radio to get the full effect of their ad campaigns. The new penalty regime is with us, but it is far too complicated for most people to understand that penalties are affected by behaviour and this is not the sort of behaviour that normally qualifies for the odd ASBO. In passing I note that a taxpayer is called a “customer” by HMRC until it comes to tax penalty guidance. When it comes to penalties you become a “person” again.
Item no.9 “the power to scale back (discovery provisions)” definitely deserves more of a mention by HMRC. S 29 TMA 1970 “discovery” may well be the exocet in the inspector’s arms stash, and the surprise value is excellent, but what about the deterrent element? If most people realised how easy it is for HMRC to reopen past tax returns surely they might take a little longer to prepare their returns in the first place?
Complaints
Mr Morgan has a good point. Those who try and complain are not given an easy time of it and there are some concerns that life will get harder in the future. The Tribunals Courts and Enforcement Act will from 2009 replace the old system where a taxpayer might appeal to the general commissioners (who are lay persons) or Special Commissioners (who are legally qualified). HMRC will then introduce a system of statutory internal review of all appealable decisions which can be made at the request of the appellant. It has just announced that a trial is being run in the direct taxes from April 2008. It says, ”Taxpayers will also find that there are many items which they can no longer appeal about in relation to HMRC conduct.”
I say that on that note, it sounds to me like a taxpayer’s bill of rights has now reached “critical" and there is cause for concern.
New powers
HMRC's proposed new powers are a worry, there are no safety chains! How do you slow down an overzealous inspector? The ICAEW has written a representation, ahead of the Finance Bill debates to draw the government's attention to the issues. Unless amendments are made, HMRC will be able to make more visits to work and home. They will be able to inspect assets and records, including statutory records and taxpayers will not be able to appeal against HMRC's decision to visit.
Wining taxpayers?
Every power needs a safeguard and we are lacking in safeguards at the moment. The existing balance is already tipped in HMRC's favour and so no surprises that taxpayers remain unhappy about investigations. It would be fairer for those who represent themselves to be aware of the issues and I don't think it really damages HMRC for taxpayers to be aware of them either, in fact the opposite.
Top tips
This week is all about tax investigations. Including ten tips for agents compiled by small business expert Simon Sweetman, whilst top tax lecturer Rebecca Benneyworth has compiled her list for the aid of unrepresented taxpayers.
AccountingWEB.co.uk 29-Apr-2008
Categories: Tax Features, Tax - Nicki Ross Martin
Times read: 7281
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Whilst we sympathise with all those who will loose out because of the removal of the 10p rate should we be equally concerned by the removal of the NI Upper Earning Limit or UEL for the well paid?
Yes, our tax friendly government is trying to remove the National Insurance Upper Earnings Limit for all those on middle to high incomes through the National Insurance Contributions Bill 2007.
http://www.publications.parliament.uk/pa/ld200708/ldhansrd/text/80430-0011.htm
That is according to Baroness Noakes Column 307 7.32pm in the House of Lords.
What is also being said is that the government is about to launch a stealth raid on pensions once again and is using an NI fund surplus for general taxation purposes. Surely, a fund surplus should be regarded as a prepayment towards the next accounting cycle, one that might allow NIC's to be reduced.
Is this why GB seems so smug about the economy? Government cannot raise taxes nor will they make unfunded tax cuts. They can however raise NIC which is not a tax but insurance and use the surplus for whatever they want. What is also strange is why when the bill was debated in the Commons during December 2007 nothing was mentioned about any of this.
