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Newth Talks Tax - IR enquiry

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3rd Dec 2007
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IR enquiry

David’s firm was dealing with an HMRC enquiry, which was proceeding alright except for two issues where he required the advice of AccountingWEB members (see 8 March 2007). The two issues were:

  • HMRC have asked to see the wife’s bank statements. She is not a partner of or involved in the husband’s business, and no business entries have gone through her bank account. In fact she earns more than the husband and pays most of the home bills. She is reluctant to become involved in the enquiry.
  • The HMRC inspector has asked a lot of questions about lifestyle. This has even extended to asking how much the bread that was used to make the children’s school dinners costs.

Can HMRC insist on seeing the wife’s bank statements? And what about the lifestyle queries?

Steve Holloway suggested that David asks the inspector what information they has that David hasn’t. Subject to that proviso both Shaun McGuiness and Martin Foley suggest that the inspector should be told politely that the wife’s records have nothing to do with the enquiry in hand. Martin also suggests that there is no harm in informing HMRC of the wife’s earnings and details of her employer. I agree with this and would also give details of her tax district reference, and emphasise that, in view of the amount of her salary, there is no need for the inspector to continue questions about lifestyle as the family has adequate financial resources.

David Lochhead suggested that the inspector should be encouraged to issue a section 20 notice if they want to see the wife’s bank statements. Rachel considers that this is dangerous, in view of the experience of one of her clients, and I agree. There has been much publicity about the routine application by inspectors to the Commissioners for section 20 notices in company cases where HMRC wanted to examine directors’ personal bank statements, and inspectors certainly do not want that sort of encouragement in this sort of case.

Andrew Prentice’s advice was ‘resist’. It is wise to remind the inspector of the scope of the enquiry – which is to satisfy HMRC that entries made on a tax return to establish a tax liability are correct. However it is worth looking at the HMRC Enquiry Manual, and in particular EM2205.

In the end one has to acknowledge that a tax enquiry demands more in terms of negotiation than technical knowledge. Inspectors are well-trained, and have all the might of HMRC behind them. It is easy for them to use the tactic of intimidation where they think that they can get away with it. Investigation work is not an exact science.

I would therefore advise David to take account of the comments made by members on the site, and then assess the result. If the inspector continues to be obdurate it could be wise to engage an investigations expert just to deal with the two outstanding points. This may be costly, but would give David some ‘back-up’, and could be beneficial to both David and the client.

Newth Talks Tax Archive

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By billgilcom
05th Dec 2007 14:03

S20(3) Notices
The present day inspector is less likely to be put off by suggestions that they should go for a S20 notice if they want to see banking accounts of parties other than the ones registered for enquiries. In fact this vcould be a dangerous ploy if the inspector is sitting with good information that would enable him to bottom the enquiry in an undesirable direction.

If it is however a lifestyle argument he would have to show the Commissioners that his persistence was "reasonable". This word in the statute allows the "Accountant/Tax Advisor" to challenge any application for a S20(3) notice. They have to be told about the intention to apply for it by HMRC before the formal action is taken.

I would also however add one word of caution in that any application for a S20(3) notice has to be authorised by a senior officer so that if you make the Investigator go down that line remember that the case is going to be seen by a senior official before it goes that far. This might give you a pointer that things might not be as clear cut as you thought.

Whatever you do do not lightly - and without a very searchign meeting with your client - allow matters to go to S20(3) as after it is granted the only recourse for appealing it is through "judicial review". Alternatively of course non compliance would then bring its own particular difficulties.

Of course if the Inspector is only flying a kite then a suggestion that he/she might wish to seek S20(3) notice might just have the necessary effect of making him/her either put up or shut up.

All a question of judgement, negotiation and dare I say it technical knowledge.

If David needs any back up could I recommend that he tries
http://www.taxadvicenetwork.co.uk

which has recently been created to provide such back up to accountants without the "Big Four fees"

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