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Enquiries: Who’s on the fiddle now, then? By Simon Sweetman

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1st Feb 2008
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Simon Sweetman looks at HMRC’s enquiry performance figures; yield is up…

It is lately reported by CCH that HMRC’s yield from enquiries into business self assessment returns went up by 35% over the 'past year'. Now reports of this sort from anybody who might be thought to be making money out of HMRC enquiries always makes me wonder whether there has been some magical representation of the figures. In this case, the report is based on HMRC’s Autumn Performance Report (p.33, table 3 and stats buffs can find it on the HMRC website). This table certainly suggests some remarkable results for 2006/7, so part of HMRC must have been working well.

CCH’s conclusion is that HMRC’s risk assessment is getting smarter. Is this the answer?

The specialist office reports are impressive, with National Teams and SCI showing an increase from £1,065m in 2005/6 to £2,618m in 2006/7 (presumably all before the offshore initiative) and large increases for the Large Business Service as well with a near 50% increase.

But if we are talking about SMEs here then we need to concentrate on the results from the network offices, though these do include work done by the local Large Business units which may be above the SME level.

Network full business self assessment enquiries is the category. These will mostly be SMEs and indeed mostly at the smaller end of the business scale. Here the yield rose from £211.2m to £264.8m – an increase of 21.6%. Which is not quite 35%, but is not at all bad. Corroborating this, the yield/cost ratio for these rose slightly from 1.9:1 to 2.0:1. This remains the least productive of any area of enquiry work (SCI’s ratio is 98:1), as it has been for some years – a few years ago it was not much above 1:1. By comparison, non-business self assessment enquiries raised £667.4m at a ratio of 15.1:1.

Now this is remarkable. There are many voices out there to tell us (anecdotally and by reference to some not altogether convincing academic research, usually from Scandinavia) that small businesses are the worst offenders in terms of tax evasion. My reply to this has always been to ask if that is the case why HMRC gets so little out of enquiries into small business. One possibility is that they are rubbish at doing enquiries, but then why should they be worse at small business than anything else – especially when so much of HMRC’s effort has always been directed there ?

During the year HMRC took up 20,341 income tax full enquiries, but that of course includes non-business enquiries. That looks like quite a substantial average – perhaps £13,000 per settlement – though of course the cases taken up in 2006/7 will very largely not be the cases settled in that year. One might also remember that there are something over 3 million small unincorporated businesses out there. At one time the enquiry target was 2% per year, but this looks like rather less than 1%: so if all your clients are being investigated it may be you that has the problem.

I also noted from the same page that HMRC seized 16,108 kilos of honey in 2006/7, which is a lot more than the average bear. It’s got to be a pretty versatile organisation. But the question is whether it is getting better at enquiries and the answer – just possibly - is yes.

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Replies (11)

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By User deleted
07th Feb 2008 11:33

Costs
The reason specific case costs cannot be accurately stated is that HMRC officers record their time spent on enquiry work under different categories but not against specific cases. This simplifies the task and saves money, especially since many cases now are team worked.
Consider this example: “down” time (team meetings, fire drills etc) for an officer doing ITSA enquiry work is debited against ITSA enquiry work. If the officer were working on (say) 30 different cases then theoretically the time would have to be split 30 unequal ways.

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By Nick E Morgan
06th Feb 2008 21:46

The True Cost
I’ve used the Freedom of Information Act to request the cost of a specific investigation.

The reply was that HMRC had no record of costs on this Self Assessment case. If HMRC don't keep records of costs how can they produce annual figures showing cost benefit ratios?

Can anybody throw some light on this? Am I asking the wrong questions?

Nick

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By Simon Sweetman
06th Feb 2008 16:43

points
Peter - in fact the EBT yield is included under non-business SA enquiries which went up by £400 million.

It may be of course that they do enquire into MPs expenses.

I have no trouble at all beleiving that in very many small business cases the accountancy fees exceed the tax take : I know that mine usually do (and hasten to add, not because my fees are large but because the settlement figure, I hope, is small !)

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By peterarrowsmith
05th Feb 2008 16:45

EBT arrears included
I suspect that the SCI return includes a lot of NIC on EBT-based cases that were pursued following the Dextra decision on corporation tax in summer 2005. Cash will have started to roll in from summer 2006, and for up to twelve months thereafter.

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By Tim Robinson
05th Feb 2008 13:46

HRMC Costs
Interesting topic - I have often wondered how HMRC measure their costs, can you enlighten us Simon?

Unless those costs are measured at comparable rates to our charging rates it may be that accountants fees dealing with enquiries actually exceed the tax take? I have heard this comment from a fees protection insurer and have seen this myself, but could never quite believe that this is the overall position for all taxpayers....

If this is the position and it is taken to its logical conclusion why don't accountants just make an annual settlement to HMRC and in return the tax authorities give up enquiring into SME accounts?

(only joking, my head is still addled after January!!)

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By User deleted
04th Feb 2008 16:02

More Buns
Perhaps HMRC should now start looking at MP's expense and salaries paid to an 80 year old mother and ascertain if she has declared it in her return as well as receiving a pension. There is perhaps more yield in this line of enquiry - squillions of Taxpayers monies paid to themselves and the so call related party payments. HMRC should also look ino expenditures by Councils where funds are paid to members of their families and related parties for "no work performance" Just thin about the squillions that be squeeze from these people and after all they stole it from treasury and treasury forcibly took it away from us through forced membership

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By User deleted
02nd Feb 2008 13:24

Agreed with John
I have checked further and agree that the inspector is at fault.

There was a double charge to NIC for several years however per ESM4400 reg 94A SSR 2001 removed this double charge for 2003/04 onwards.

The argument at the time (per my copy of Tolley's NIC 2000/01) was that when the earnings from the office were paid into the business they lost their identity as employment income and became business income liable to class 4 NIC as well.

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By John Savage
02nd Feb 2008 10:04

Not how I read it...
Thanks Anon, but that's not how I am reading EIM68205. I agree with you for taxation purposes, but to quote the relevant part of the EIM68205 (a copy of which she sent me) "The practice of treating the remuneration of a sub-postmaster as a trade receipt of an individual or a company applies for income tax purposes only. HMRC continues to require payment of Class 1 Nat Insurance contributions by the Post Office. The amount to be included in computing the trading profits is the gross remuneration before deduction of National Insurance contributions. National Insurance contributions are not an allowable deduction either from employment income or the receipts of the trade"

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By User deleted
01st Feb 2008 17:10

Sorry John...
... but I think the inspector is right.

Post office salaries are paid subject to deduction of class 1 NIC but still form part of the profit for class 4 purposes. Unfair I know but that is how the rules are drafted.

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By User deleted
01st Feb 2008 16:55

Small business enquiries
HMRC devotes enormous resources and man (and woman) power into SA enquiries of small businesses, often unnecessarily and for little return. I do not agree with the campaign by Taxation magazine regarding the reduction of HMRC staff, backed by at least one of the professional institutes.

If HMRC stopped 'hassling' small and honest businesses, then perhaps some of the Department's staff problems would come into perspective.

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By John Savage
01st Feb 2008 13:55

I've always wondered....
... now that we are all being forced to file using Internet, if many of the Revenue staff who are not having to be utilised keying information from paper returns onto the Revnue's computer systems are now being released into enquiry work.

I've noticed a slight increase in the number of enquiries amongst my small business clients, and it seems the standard of Revenue experience seems to have dropped dramatically. Indeed, so much so that in one case I have at present the officer has clearly not read Revenue manuals, and is wanting one of my clients to pay class 4 NI in addition to class 1 on his Post Office salary She must have spent hours drawing up 6 years worth of figures!!

I've advised her I shall be billing the Revenue for my time sorting out her mistaken enquiry and aclimatising her with the regulations.

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