HMRC check for tax returns for subcontractors.

HMRC check for tax returns for subcontractors.

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Hi All,

Last year I was approached by HMRC for the expenses on the tax returns for the subcontractors working in CIS. They have now contacted and are willing to visit our office to check the files and go through the tax returns. They have sent the letter stating that they are visiting all the accountants specially those who are submitting the tax returns with the refunds. 

Someone I know have also been visited and the people from HMRC have literally rejected all the expenses that were entered in the tax return like stationary and printing which seems legitimate as they are spent in the course of work. They have also asked them to amend the tax returns of more than 100 clients taking out the expenses which were entered, which to me seems not right as it should be HMRC notifying the clients directly and amending their tax returns if they are not satisfied with the expenses rather than asking the accountants to do that. The expenses entered in the tax return are although estimated in some circumstances, but rejecting them overall is a bit too harsh from HMRC. 

Will be quite useful if other people can share their experiences for any such enquiries they have from HMRC for this year and could advice how to deal with them in the meeting. 

Replies (37)

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By ccassociates
22nd Oct 2012 16:18

Your having a laugh

What authority do HMRC have to walk into an accountants office and go through files willy nilly ?

 

None so send them packing

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By David Green1
22nd Oct 2012 16:36

CIS Subcontractor Expense Claims

I have heard on the 'grapevine' (other accountants who have had the letter re practice visit) that they were looking at subcontractor tax returns where the expenses claims exceed 25-30% of the income figure disclosed on the Return. They are fully aware that a vast majority of the expenses claimed are estimated and not supported by vouchers or business records of some sort.   

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By justsotax
22nd Oct 2012 16:54

Agree with CCass...

not sure HMRC have any rights to your files ...and if these figures are estimates then why would they need to....the vary fact estimates have been used indicates there are no/very few receipts.

 

Tell them on what basis you calculated the estimates and if they want to challenge then next stop a tribunal....

 

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By ccassociates
22nd Oct 2012 17:05

I am aware that HMRC are going for dodgy "accountants" ( none of whom would be on here) who literally make up the expenses and only deal with subbys, but that is another matter.

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By Andrew Lee
29th Oct 2012 11:30

Not before time

In the course of my work for the ACCA as an independent assessor under the disciplinary process, I came across a firm who only acted for subcontractors and who paid hefty commission for all introductions.  Without any records whatsoever, they would systematically estimate all the expenses claimed on the basis of a standard formula and then get the subcontractor to sign to say he/she agreed all the estimates and accepted all responsibility for them.  Subcontractors do not read what is put in front of them and are purely driven by the tax repayment promised and will sign anything to get it and the bigger the better.  Needless to say, when an enquiry arose, none of the estimates could be supported and hefty penalties and interest ensued, with the subcontractor blaming the accountant.  However, because the accountant had very carefully covered his position, no responsibility could be attributed.  Read the small print never being more in point.

This firm had hundreds of similar clients, who all flocked to the firm because of the high level of refunds being achieved.  This kind of business practice is totally unacceptable and I think HMRC's action is long overdue.  Only by targetting such firms will the problem be stamped out and only then we will be able to operate our own practices on a level playing field, which is all I want. 

 

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Replying to Triggle:
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By KenKLM
29th Oct 2012 11:55

Promising CIS refunds ...

Well said Andrew ... I have long been arguing that any "accountant" offering refunds without even seeing the records and then taking percentages cannot possibly be legitimate as every subcontractor's tax circumstances are different .... particularly when they are higher rate taxpayers or have low expenses . Why should an accountant gripe that HMRC want to see that legitimate expenses have been claimed ? They should have reviewed the expense claims with the client in the first place and asked for at least some sort of supporting evidence .  Let's hope the taxpayers wake up and realise something too good to be true is just that .... and the agents involved get to face criminal charges ?

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By Robert Clubb
29th Oct 2012 12:37

Now Is The Time To Earn Your Fee

Beleive me, I know that clients can be a pain and subcontractors have always heard about the guy on site who earning twice as much and paying half the Tax & NIC, but you have a resonsibility here.

I do appreciate that, for example, you would not know if vehicle cost covered the actual mileage but,  ssssuyou must have formed a view when you prepared the accounts as the the adequacy of the expenses claimed. If you had any reservations, you should have expressed these, preferably in writing.

If, having discussed the matter with the client, you are supportive of the expenses claimed, then fight. If not, you need to devise a contingency plan.

In 40+ years in practice, I have only once heard of HMRC sysyematically going through one agents files. In that case, they had good reason to, as some of the accounts they prepared didn't even add up!  As the immediate past chairman of the local Working Together group, I have not heard of this 'block review' being one of their current strategies.

So, do your homework and find out eaxactly why you are being targeted. Remember, HMRC will walk all over you for a quick win, if you lie down long enough and you gain a reputation for being a 'soft touch'. Furthermore, your clients will have a reasonable expection of you knowing your stuff and fighting their corner, where it is reasonable to do so.

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By johnsmith311
29th Oct 2012 13:36

Not asking the accountants to amend the returns

I do understand the position of HMRC to check the accountants records claiming expenses for the clients on estimates without the reasonable records and logics. But asking the accountants to amend the returns for all clients when the expenses have been agreed by the clients is a bit too harsh.

Many accountants purely dealing with subcontractors put expenses to get refunds so that the clients do not go different accountants, but will the HMRC ever be able to stop the accountants from doing this, considering there are hundreds and thousands of accountants purely working in this industry for this purpose without having affiliation with any accounting bodies.

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Replying to lionofludesch:
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By The Black Knight
29th Oct 2012 14:42

About time some action was taken.

johnsmith311 wrote:

Many accountants purely dealing with subcontractors put expenses to get refunds so that the clients do not go different accountants, but will the HMRC ever be able to stop the accountants from doing this, considering there are hundreds and thousands of accountants purely working in this industry for this purpose without having affiliation with any accounting bodies.

Can't believe I am seeing this....is this post a wind up?

Not ethical and professionally qualified accountants.

If they have assisted in the fraudulent claiming of expenses that's 14 years? Is it not?

Those so called accountants involved should feel lucky they are just being given the opportunity to correct their shoddy work!!

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7om
By Tom 7000
29th Oct 2012 13:56

Its easy to stop

HMRC just make a new rule. All expenses need an invoice. No invoice no expense ever. Anyone found submitting a return without a receipt, fine £1000. Any accountant found aiding an abetting the submission of a return, fine £10,000

There you go solved it

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Replying to lionofludesch:
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By androo235
31st Oct 2012 18:53

You're a genius. You've solved unemployment too

given the army of clerks that will be needed to check compliance (as alluded to in several posts above). The charade of the NCE's tax system goes on. This thread is about the grubby end.....

Henry George - Progress and Poverty. Mason Gaffney - Corruption of Economics

Steve Keen - Debunking Economics and Positivemoney.org (Ben Dyson even got 15 mins of R4 last week......)

 

We're not so different from the Greeks. I'm thinking of the recent publication of the list of 2,000 or so Greeks with Swiss Bank accounts by a journalist. The list has been in the possession of the Greek authorities for at least 2 years, they did nothing, the journalist has been promptly arrested. Of course our system is more subtle and will not be forced into the open so easily as this but essentially it does the same thing. Only the little people pay tax.

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By justsotax
29th Oct 2012 14:13

Will the invoices need to be on headed

paper with the firms address on, or is a hand written invoice ok?  will the invoices need to be on formally approved paper or are carbon copy invoice books from WHsmith acceptable....will it be up to the accountant to ensure that the invoice is not a 'false' one, will he need to phone the firm to check that money was spent with them.  And if it is on a WHSmith book, will the subbie need to keep details of the person they purchased the goods/service from....presumably the firms name on its own wont be good enough....!?!?

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By Robert Clubb
29th Oct 2012 16:53

Yes..........phone them all...

Yes, justsotax, we always telephone every name on every receipt supplied by every client and ask for written confimation or CCTV evidence..............

Well.......you started it!

 

 

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By justsotax
29th Oct 2012 17:16

who me...?!...i was just suggesting

that requiring an invoice for every expense in itself really solves nothing.  If someone wants to fiddle they will....and if the accountants fee is based upon the value of the repayment then that seems to just oil the wheels for fraud to take place.  

 

 

 

 

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Replying to StartUpAcc:
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By coverack
30th Oct 2012 08:10

who me...?!...i was just suggesting

I routinely respond “yes” to the must-be-answered question “Does this Return contain provisional or estimated figures” when, after discussion with the client, we have arrived at estimated figures for Use of Domestic Premises for Work, private use of mobile/landline/broadband etc., AND put a brief note or notes in Box 19, Page TR6.  Quite apart from the irritating feature where only specific key-board characters are acceptable, the problem here is that (or so I understand from the Agents’ Helpline) any narrative in this Box is not taken into account in when the Return is processed.  (One might be more successful overall in dealing with the situation via the invitation to attach a .pdf file, particularly where the estimate in question is less than straightforward.)

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By Robert Clubb
30th Oct 2012 10:15

Correct!

The white space if read, only once HMRC decide to look at the Return.

Often, the white space contents avoid HMRC from going any further, if they explain the reason(s) for the intial selection.

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By justsotax
30th Oct 2012 13:37

Not sure that is an issue...?
If the figures are so odd that the revenue feel the need to enquire then the expense should stand up to scrutiny albeit maybe with a difference of opinion on the calculation. White space entries ensure that the revenue have the 'full facts'. If they choose yo ignore these by not reading the detail then they cannot expect to argue over prior years calculations.

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By The Black Knight
30th Oct 2012 13:56

The disallowance is likely to be on the basis of unsubstantiated expenses. Not sure the white box would save you from that.

would it look like?

"the expenses in return have been made up by the accountant to achieve a refund and may be excessive so that the accountant can be paid"

or

" the accountancy fees are an estimate based on a percentage of the maximum refund that may be achieved these may alter if HMRC challenge the return"

or

" our accountants are not sure what we are entitled to claim so we have claimed everything and there may be the odd plasma TV included in sundries"

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By justsotax
30th Oct 2012 15:13

Or maybe
"The estimates are based upon the locations where work was done, material costs were estimated using current prices and estimated useage per job etc etc....'

I am sure every business you do work for keeps every receipt and doesn't claim for any that are missing, and if he 'tried it on' I am sure you would put him right. The fact is some people are worse at keeping records than others, and whilst there are accountants who will just fiddle the system most try their best to prepare accounts that truly reflect the expenses incurred in that business to create that turnover - I thought that was what accounts were (or have they been redefined as to reflect only receipted items?!)

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By The Black Knight
30th Oct 2012 15:47

So if you don't keep any records then your accountant will make some up, particulary useful in a cash world or where the client paid for the materials.

I can see your reasoning in an audit situation or investigation where the question is do the figures make sense.....but would not agree in the situation where accounting records have not been kept......subject to fire or flood etc where a genuine reason for incomplete records takes place.

Equally a receipt verification (vouching remember that) is OTT but there is a difference between a client writing down, say parking charges in his records and the accountant assuming that there ought to be some for tax reasons.

o.k if you have some other supporting documentation such as a payment or explanation. But a whole set of accounts on the same basis as a business plan or forecast? The basis could be.....about the same as last year....copy..... and achieves the expected or desired result.

If I was an inspector I would be looking for a £3000 fine. Would also disallow unsubstantiated expenses.

Keeping clients safe from investigations and penalties is also part of my role.

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By justsotax
30th Oct 2012 16:41

I am not suggesting someone
Make it up....but the facts are that a subbie is unlikely to be doing work in his front room, the facts are (receipt or no receipt) that he would have to travel to a location at the very least. I would suggest most subbies only have travel and phone and then a few other items. Fraudulent accountants is one thing, making a reasonable stab (constructive review of comparable subbie, location, type of work etc) at expenses in the absence of receipts is another.

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By AccSec
31st Oct 2012 11:19

Similar Visit ourselves

To the original post...question...We had a similar visit ourselves and we didn't didn't find that the officers disallowed ALL expenses like your friend contends. Are you sure he is not referring to ESTIMATED expenses (without valid justfication for the claim) that were disallowed? Of course any expense has to be incurred for business use and meet the wholly & exclusive test to be allowed. As you may appreciate, for eg ordinary clothing is not the same as protective clothing and if a claim for ordinary clothing (however dirty and distinct they are for the work the subbies do) has been made even with receipts they are not allowable for tax purposes.

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By johnsmith311
31st Oct 2012 12:18

Expenses mainly disallowed

Thanks Accsec for sharing the experience. After recently speaking to my friend, inspectors have disallowed any expense included as use of residence as office, which was less than £10 per week in some cases. Also they are of the opinion that subbies do not incur any expense in postage and stationary and therefore they want to disallow all of that included in all the tax return.

To my surprise they want the accountant to amend all the tax returns and claim only 10% of expenses of the gross turnover, which to me seems bit harsh, because I have submitted the tax returns for subcontractors who have genuine expenses of more than 25%. Also if HMRC wants to amend anything in the tax return, they should really be approaching the client for that and open an enquiry for that particular tax year rather than asking the accountant to amend the tax return by claiming only 10% expenses.

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By AccSec
31st Oct 2012 13:16

It's your decision

If your friend can justify his claim for Use of Home as office, there is no reason why he cannot justifiably argue his point. I accept that to disallow all of of UOHAO is not correct & he needs to ascertain from each client what costs they incurred. If htere is no evidence of this, the tax office are taking this harsh view. £10 per week for a groundsman is for eg excessive but for a Contractor that operates from his home and who engages subbies it is not.

I suspect your friend may not have any receipts for business expenses provided to him when he prepared his Accounts and hence the tax office are not prepared to allow more then 10% claim. If you have claims over 20% and you have not seen ALL the business records to support the claim then you could be in trouble. However, the usual test of expense being incurred and then being wholly & exclusively for the business is important to be established in such cases.

The view we took is it is better to co-operate and learn what the tax office are looking for from us and clients and then educate our clients accordingly. After all, we all wish to see the end of bogus, unsubstainted claims so that all efficient practices can reap the benefit from their hard work. The clients see us as professional agents and we have a duty of care towards them. 

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By ccassociates
31st Oct 2012 13:33

Provision

It is one thing making up expenses which we all know is wrong, however making reasonable provisions is a different matter particularly if the provision is supported by fact.

We regularly attend start up courses for newly self employed run by a local business group and funded by WAG, HMRC also attend and tell the prospective subcontractors that providing hey can provide evidence that the expense was met and the claim is reasonable then it will be allowed.

For example they will accept a claim of up to £4 per week for use of home without question. if mileage records are kept or can be created they will accept mileage claims. Protective clothing is allowable and does not just mean boots, but clothing that is intended to protect you from anything, such as cold, rain,heat, dirt, chemicals toxic substances etc, also Hi viz clothing is allowable

A sweeping statement like you can only claim 10% is both unreasonable and unjust, the poor subby may have tooled himself up for lots of work that didnt materialise,

I do however tell all my subby clients to keep records or face the fact they may be losing out.

On the other hand one can not always rely on receipts, particularly for fuel, I cant forget the client I had who used to gather receipts for everything from all the family so we got deisel,and  unleaded  purchased within 10 mins of each other 60 miles apart and "workwear" aged 10-11.

The best receipt I ever saw was handwritten for "24 white spheres" listed as materials, they turned out to be golf balls. 

 

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By ShirleyM
31st Oct 2012 13:45

Doesn't sound right to me :(

Either some info is missing or we are all up the creek without a paddle!

Limiting expenses to 10% of turnover? Especially as subbies are having to travel far & wide to get work these days and that costs a lot given current prices of fuel. Most hard-up subbies run a beat up old van, and they are not very fuel efficient.

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By ShirleyM
31st Oct 2012 13:48

@ccassociates

Some clients do try it on, but apart from putting unleaded in a diesel van (and no expensive repairs!) the best claim given to us was baby clothes and ladies lingerie. I know some kids help their parents but that must have been one amazing baby, and the lingerie was not trade related :)

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By androo235
31st Oct 2012 18:50

I hit the reply button and assumed

that my comment would attach to the one that I'm responding to, but it didn't. It was/is a response to Tom 7000 who suggested, probably playfully, that fines for clients and accountants (which I suspect already exist anyway) would solve the problem.

But why would tax accountants want it solved, after all, the uncertainty and the argy bargy is the grist to their mill.

Henry George - Progress and Poverty.

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By patman777
01st Nov 2012 16:03

You could go to jail

A few years ago an accountant was sent to jail. He used to obtain tax refunds for subbies of £2k to £3k and charge them a fair bit for doing so. He used to make up the expenses in order to obtain a decent sized refund. He got a lot more clients this way.

Accountants such as these deserve to be in jail.

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By justsotax
01st Nov 2012 17:01

just shows the dangers of linking

fees to 'success'.....

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By AccSec
01st Nov 2012 17:39

Our concerns

I agree completely with patman777. These are the kind of Tax Agents that will be out of business once the tax office officers start visiting them. Our concern are the clients that file the returns themselves and receive high tax refunds immediately and the tax office do not put in place adequate checks to stop such abuse. Their typical argument is process now and check later.

Our other concerns are around Tax Agents that offer cash in 24-72 hours after receipt of client records...guaranteed. This normally happens at the start of the tax year when exisitng clients are sending their records in as well as new clients coming through the door using this method. How Tax Agents can possibly work out a client's tax refund based on actual receipted income & expense record in such a short time is beyond us. I can only imagine that a lot of estimation must be going on or alternatively relying on qnairres completed to knock out a set of Accounts. These are the Agents the tax office should focus on too to make it a level playing field for all Tax Agents.

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By taxhound
01st Nov 2012 19:22

Expense claims

The best invoice I ever found amongst a subbie's records was for an engagement ring for his future wife.  I did not allow that one...

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By Tom 7000
02nd Nov 2012 15:00

Engagement ring

I can top that...I had one try to put his wedding through as he invited two clients

And another his yacht as he did a lot of thinking on it

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By taxhound
02nd Nov 2012 15:18

Then surely

If he invited clients, it was genuine entertaining which should go through the accounts- and probably tax deductible too as I am sure his mate down the pub was allowed it by his accountant....

 

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By B_Wood
21st Jul 2014 08:41

HMRC visit

I've just had a visit, as I didn’t have anything to hide thought it may be helpful to see what the revenue had to offer and what happened was nothing short of blackmail. They arrived (always come in pairs) and had a two hour grilling on how I ran my practice, I had all files together as they requested with accompanying papers, the only thing I didn’t have was car insurance tax and MOT as clients need them we see them then give them back. Due to this anomaly she wanted me to 'amend' all my sub-contractors tax returns adding back 20% of motor cost, 80% of general admin and reduce home office to nil. If I didn’t agree she would put my client list through for investigation! I have refused to do this and am awaiting the outcome. If word gets round that I have had a revenue visit, no matter how good my client’s records are I am going to lose work

If anyone has any advice on this would be most grateful.

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Replying to lionofludesch:
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By Jane Louise Walker
29th Jan 2015 13:24

Hi, just wondering what happened with this. I have had a visit and they have asked me to amend clients returns across the board for all CIS clients.

They want me to take of 50% of phone costs, change the Private usage of vehicle from 10% to 20% and to add back 75% of all other expenses, however a lot of the clients will have had receipts so why should they have to add backs at all?

I would be agreeable to amending clients on a client by client basis, where I can look at each client and see if they had receipts or not, if they did have receipts I dont see why I need to add back anything, but this is what HMRC are demanding.

From what I have read I am about to lose a lot of clients as they will all run away.

Any help would be appreciated.

 

Jane

 

 

 

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Replying to INITMAN:
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By B_Wood
24th Feb 2015 12:59

Hi Jane

I decided not to take this laying down and approached my MP who in turn wrote to HMRC for an explanation, this came back in the form of a letter from a HMRC official who has studied politics, every question was answered with a question and still none the wiser. So am in the process of taking it further. I have decided to let the revenue go to the expense of investigating each individual client.

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