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Newth Talks Tax: Enquiry opened - submitted accounts ignored

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21st Jul 2008
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Enquiry opened - submitted accounts ignored

John R introduced an Enquiry scenario in his query of 16 July 2007. He had received an opening letter in respect of a client from a distant tax office, requesting a copy of the accounts, tax computations, details of capital introduced and one or two other items.

The accounts, computations and details of capital introduced had already been sent to the taxpayer's local tax office. On telephoning the distant tax office to enquire about why the matter was being dealt with there, the inspector replied that, due to recent HMRC reorganisation, any tax office may commence an Enquiry into any taxpayer, no matter where they are situated.

John R also asked why the longstanding policy set out in Working Together Issue 14 was not being adhered to – in other words examination of the accounts and computations before the Enquiry was opened. The inspector replied that it was now policy to ask the accountant/taxpayer for this information in the first instance and only if they refused would the local tax office be asked for the details and documents.

The main concern of John R was that he felt that the Enquiry may not have been opened at all had HMRC bothered to examine the submitted accounts and computations in the first place.

Phil Rees referred to a similar case that involved a partnership and was settled with no extra tax, penalties or interest. However, the inspector refused to refer to accounts and computations already submitted. The worst part was that HMRC always demanded a reply to letters within five weeks, which was given, but failed to reply to letters on the same time basis. The stress on the client was considerable.

Euan McLennan was surprised that accountants were still submitting accounts and computations with the return after ten years of self assessment. Presumably HMRC take the same view. No doubt the case was picked up via the Revenue's computer system, which appears not to be able to pick up 'white space' entries. Phil Rees replied that submission of accounts and computations was a defence against possible discovery assessments. John R interjected that the white space entries should also save the taxpayer from unnecessary enquiries.

William Stevenson queried whether the Revenue's actions demonstrated a lack of care and attention. In suitable cases they should be billed for making the accountant supply unnecessary information on behalf of the client.

Lis Daly queried whether the use of the White Space and submission of accounts and computations had ever actually prevented a discovery assessment. The ICAEW guidance on the matter seems to be ambivalent. If one completes online filing of returns there are problems in attaching relevant documents. Nichola Ross Martin considered that there was little point in sending pdf Accounts. However it is essential to attach computations where a capital gains computation is required. Accountants should always do a risk assessment before submitting returns. It appears that the newly self employed and subcontractors are most at risk.

Anver Patel disclosed that he had a similar case involving a pension premium. Accounts were wrongly prepared showing the premiums as a P & L item, but in his view discovery was not at issue as HMRC had the information all the time. The matter went to the general commissioners who would not determine the issue because it affected other taxpayers, and have passed it on to the special commissioners. A decision is awaited on this mater. Meanwhile the inspector has reduced the assessment for the later year but still claims 'discovery' for an earlier year. It would be interesting to know what the 'specials' decided.

This is an important query that raised a number of issues. There has always been controversy about whether or not accountants should submit accounts and tax computations with the self assessment return. Personally, I side with Robert Maas, who suggests that as much information should be sent to HMRC as possible in order to avoid discovery. It is sad that the ICAEW does not provide more definite advice.

The issue of remote tax districts opening enquiries simply on the basis of information captured from a computer for any taxpayer is alarming. The professional institutes need to raise this matter with HMRC in their consultations. It must be pure laziness (or perhaps instructions) that prevents Enquiry staff from checking on all information submitted before opening an Enquiry. Incidentally, despite their love of computers when is HMRC going on to e-mail?

Newth Talks Tax Archive

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