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IR Investigation

IR Investigation

Self employed trader in mainly cash business hasn't kept records of cash in & out of the business separate from personal cash. The revenue contend that by assuming drawings were taken out the business at the same level each week (not correct) this would result in negative amounts therefore more money must have been received. If the cash flow was reworked to show more realistic seasonal drawings then the negative balances would disappear.

The traders problem is that he didn't keep records or count cash at any time as he thought that keeping copies of all sales/purchase invoices and keeping records of cash sales would be sufficient.

The revenue can't prove that undisclosed sales took place but neither can the trader prove they didn't.

What is not in dispute is the fact that insufficent records regarding cash reconciliations were kept or that personal & busines money were kept separate.

The revenue suggested a negotiated settlement.

Is this worth taking to appeal & what would be the chances of winning? - I know, how long is a piece of string but if anyone has any experience of this sort of investigation comments would be appriciated.


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By Anonymous
25th May 2001 01:33

IR Investigation Part I
Assuming that the client is undergoing a self assessment enquiry, then the provisions of section 12B, Taxes Management Act 1970 apply to the books and records.

Effectively ‘incomplete records’ are now illegal. It is important to ascertain, apart from the cash situation, whether the client has complied with the paragraphs of this section – i.e. has he kept details of purchases, sales, stock, money in and money out? If not, he might be vulnerable to a record-keeping penalty, although nothing like the £3,000 maximum.

With regard to the cash situation the Inland Revenue is basing its case on assumptions, whether they be correct or not. This is the usual tactic, and assumes the taxpayer to be ‘guilty unless proved innocent’, which goes right against the principles of United Kingdom general law. While it will not help your client a challenge to this stance must be made under the human rights legislation in the foreseeable future.

What might be helpful to you is the VAT tribunal case of Adrian Moon trading as Craftmaster Construction (14855). Mr Moon was a jobbing builder, who kept detailed records of sales and purchases, but had only one bank account, which he used both for personal and business purposes.

(Continued below)

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30th May 2001 20:04

Record keeping
The profession has known for some time that it is more important than ever that clients keep a full record of all "ins" and "outs" and at any time the business should be able to assess its assets and liabilities . This has to include all payments including drawings . If taxpayers are too lazy to keep full records , or not getting the correct advice from their advisers , then they leave themselves open to protracted investigation . I think it is an important point to not over argue about the right's issues and technicalities , although I strongly condemn HM Inspector of Taxes "guilty until you prove yourself innocent" attitude , but face up to the reality of SA - records must be more complete than many taxpayers have been able to get away with in past years if they are to avoid costly investigations . Whether we like it or not , the onus is on the taxpayer and we , as accountants , are looking more to educating clients and improvements to their record keeping in order to avoid investigations as an alternative to allowing them to continue in their old ways of bagfuls of receipts .

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By admin
30th May 2001 16:01

drawings and s12 TMA
If the trader has no separate business bank account, it is surely impossible for drawings to be within s12B(3)(a)(i). It is also pretty difficult to produce a balance sheet for the business where there is no separation of business and personal assets.
What are drawings but a transfer of funds from the business to the personal possessions of the proprietor (which is impossible if they aren't separate), or the business buying something directly for the proprietor? If the business buys something directly for the proprietor, that is not "expended in the course of the trade", and therefore no record is required by TMA.
The records of sales and purchases, and business payments and receipts, are clearly enough to satisfy the statutory requirement. It's neater if you have separate bank accounts (when, arguably, drawings do fall within the section), but it's not mandatory.
It's also silly of an Inspector to suggest that somehow having separate accounts is more "respectable". It's at least as easy to leave receipts out of two bank accounts as it is out of one - so it ought to be irrelevant.

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By admin
29th May 2001 19:30

Refreshing View

It is refreshing to read Paul's views on General Commissioners, I too have no fear in attending a GC meeting providing a)the client is aware of the consequences and b) I believe I can outwit the Inspector and produce a better case. Far too many Practitioners seem to be scared of the Revenue and the Commissioners.

My record is five wins out of six in the past eight years. The loss was a case which we took to the GC's on a matter of principle but always knew we were on for an uphill struggle.

The reply I have used though admitely not in front of the GC's to the Inspectors comments "that he is only trying to check the accuracy of the return" is (Providing no drawings figure has been shown on the return)
What figures on the return are you trying to check these drawings to ? - I have found at this stage they don't know what to say.

For all 2000 tax returns onwards my firm has taken the decision not to include Balance Sheets on the SA pages. So far we have not had one Schedule D Case 1 investigation start. -over 300 returns submitted for the year. Is this because the Inspectors don't know where to start unless they have a drawings figure ?

PS - Note to Paul - I am due to go to the IOW in July - I will watch out how good the staff in the pubs are at pulling pints

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29th May 2001 18:26

Thoughts on records #1
I'm not an investigations specialist, but sole principle of a (by Sole Principle standards) largish practice and we have our share of Schedule D enquiries coming through under SA. The Inland Revenue locally are targetting Pubs at present, and just about every publican client has or has had an investigation. A few thoughts from the sharp end:

First issue, I would agree with Graeme Davis on the issue of drawings not forming part of the return. I've taken this point to the General Commissioners and the Inspector has agreed - there is no compulsion to record drawings or to balance cash balances, however (with much smirking and wringing of hands)Inspector to Commissioners: "not having an accurate drawings record makes it difficult for me to check the return which is all I want to do".

This is an issue which desperately needs litigating so that there is a definitive statement from the courts as to what the minimum standard of records required is; my advice to clients was always a good record of takings - till rolls, till count, sales invoices. However it seems prudent now to advise the clients to go a stage further - but my dilema is thats more than is legally required, and this is giving in to "big brother" at the tax office on records. Its the start of a slippery slope to everyone must have full double entry records, and if they don't then the records must be defective.

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29th May 2001 18:28

Thoughts on records #2
Secondly, Business Economics. I'm changing tack with these; historically I've re-worked, with corrections the IRs attempts at Business Economics and sent the results back to the IR, but this becomes a downward spiral of whose version is most reliable - its also extremely time consuming with each side arguing a diffferent model and presentation. I'm tempted to re-work in house but rather than share with the Inspector, simply respond with points in the IR model which haven't been addressed properly - and try and back them into a corner where they have to come up with correct figures. On Public Houses wasteage is a key issue and my experience is the IR models underestimate this grossly.

The dilema is how much time do you devote to creating your own model and at what stage do you do this. IR enquiries seem focused on either BE or cash, so there is a strong argument to put the work in up front on creating the models.

Thirdly, meetings: the concept of faster working seems to have vanished - I often wonder if our colleagues at the Inland Revenue know the meaning of fast! I wonder whether taking the initative and demanding a meeting with the Inspector as soon as he has had chance to review the records is a better tool for practitioners to take control of the process.

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29th May 2001 18:29

Thoughts on records #3
Finally, General Commissioners. I speak to a number of practitioners who have never been to the GCs and have no intention of starting. My experience of taking four cases in the past six years or so has, generally, been positive. I think practitioners should be bolder in their use of the GCs, so long as clients understand it is a "do or die" scenario. At present my firm is concluding an investigation which has run for around four years on a public house, with two GC meetings and a third imminent. Once we have settlement, I will offer John Newth an article on what has been a, er, interesting case, and possibly the Inspector could be offered a right of reply - Sub Judice at present, but the case has got "Fathings Steak Houses" written all over it.

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By admin
29th May 2001 17:13

Record Requirements
Having just read the various comments on the case raised by Julia I note that the Case has now been completed however I would comment as follows:
Whilst not specialising in Investigations I have acted for all my firms enquiries for the past five years and have also assisted other practioners in a number of cases.
It is noticeable that the Revenue's current policy is to look at drawings and try to create a shortage of available cash for the individual to live on. This is either done on a yearly basis or a weekly basis.
I have a client who like Mr Moon uses his one bank account for both personal and business use. The records are kept purely on an invoice basis, which are perfectly adequate to calculate the clients taxable profits.
The Inspector has tried to say that the records are incomplete in that they do not include drawings, however so far he has only managed to quote S12B(3) TMA 1970 which states the following records should be kept "all amounts received and expended in the course of the trade, profession or business and the amtters in respect of which the receipts and expenditure take place "
The question therefore arises as to whether drawings fall into the category of amounts expended in the course of the trade. It is my contention that they are not and therefore no record is required to be kept.
So far the Inspector has failed to answer this point and my questions as to why a self assessment return only makes it optional to include drawings. I did tounge in cheek offer to produce a list of drawings provided he allowed them as a deduction in arriving at the taxable profit - this he declined.
At present he is desperately trying to conclude his investiagtions (without any adjustments) rather than answer my questions.
I am also concerned that Julia's client is worried about the investigation
Graeme A Davis BA ACA ATII

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By admin
29th May 2001 17:17

Record Requirements

Continued from below,

Julia's friend should only be worried about an investigation if they have done someting wrong, as I explain to all my clients, if you have nothing to hide then the investiation should be quick simple and over without any adjustment to their tax liability.

Graeme Davis BA ACA ATII

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By admin
28th May 2001 21:13

Thanks to everyone who has contributed. The trader - not my client but a friend has reached a settlement with the revenue.
The whole thing has been extremly stressful and expensive for him & he now has insurance to cover fees for any future investigation.

I will be helping him set up new systems to ensure he complies with IR record keeping requirements in future.

Thanks again

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27th May 2001 13:50

Another piece of string?
This has attracted a lot of comment, and from some very distinguished respondents. I don't think I could add anything further from a purely technical view, but I would like to offer an opinion on procedural matters.

In any proceedings before the Commissioners, the onus is on the Inland Revenue to show that in the balance of probabilities the appellant is in the wrong.

It may be that reworking cashflow on an annual basis would give a more favourable result, but is this credible in fact? My weekly outgoings don't vary seasonally- I still have to feed my family and pay my mortgage each month.

Seasonal drawings are a tricky one- you will need to demonstrate that your client accumulated a large pile of cash in busy periods, and this can be hard to prove.

If you have a workable case, then take it to the Commissioners. You will get a fair and unbiased hearing. If the facts support your case, then you will win.

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By admin
25th May 2001 20:16

Too late he cried
I read the question and thought, "ey up you do investigation work, give 'em the benefit of your experience". John and Peter have beaten me to it. They have set out the difficulties (lack of prime records) and the possibilities (build as strong a case as possible from other sources) and then the bit that usually galls, decide whether the costs outweigh the tax at stake. Some people might think that John's comments about "over the barrel" are unduly cynical. I do not think that all Inspectors are the same. However, I have heard far too many stories of cases where the argument is not worth the powder and shot so that the taxpayer gives in rather than fighting a valid case so that I have to agree with John's comments.

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By admin
25th May 2001 11:57

negotiate, negotiate
Thoroughly agree with Peter Howarth. Once you have your own figures, go and battle it out one to one, and be firm! In these cases an Inspector will know that he or she is going to get their "brownie points", and because of the lack of prime records and uncertainty you are going to have to accept that the Revenue have the upper hand.
How much you let them have, and how much your time costs must be born in mind. I always estimate "best case" and "worse case" scenarios before I start, or else you can find yourself trapped into conceeding something you didn't want to.
Negotiation like this does very much come down to force of personality as well as facts! Best of luck.

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By Anonymous
25th May 2001 01:32

IR Investigation Part II
Customs and Excise made the usual assumptions, and regarded all the unidentified credits to the bank account as additional takings. Assessments, interest and penalties were imposed accordingly. However Mr Moon took his case to the tribunal and won.

The tribunal members were obviously realistic and sympathetic to the small businessman, and made two important findings. Firstly, Mr Moon only had to satisfy the tribunal ‘on the balance of probabilities’ that the unidentified credits related to loans from the family, sales of personal equipment etc. Secondly there is no statutory obligation on a taxpayer to keep separate business and personal bank accounts.

You and your client therefore have to decide whether the case is worth appealing to the Commissioners. This will depend partly on whether the client’s other records are in good order and whether he will make a good impression as a witness. The other important consideration is costs. The Inland Revenue is well aware of this aspect, and that is why it puts small taxpayers (without fee insurance) and their advisers ‘over the barrel’ so often. The composition of the panel of General or Special Commissioners is also crucial.

Taking a case to the Commissioners is a risk, but is sometimes justified. None more so than in the case of Mr & Mrs Scott trading as Farthings Steak House (SpC 91). On advice, they took their case about a Revenue business economics exercise in an investigation to the Special Commissioners. A lawyer versed in criminal procedure humiliated the Revenue, won the case, and costs were awarded to the taxpayers. Undoubtedly the taxpayer and advisers took risks, and one suspects that the advisers were determined to take the case to appeal on a matter of principle, whatever the costs and whether they could recover them or not.

Whatever you decide to do, the best of luck to you and your client!

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By admin
24th May 2001 08:42

get a good accountant, and b prepared to pay!!!
07976253541 [email protected]


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24th May 2001 14:05

IR Investigation
Unfortunately I have been through a tax investigation with the revnue but for a limited company, and after a year and a half of arguments with them their attitude is, that if you cannot prove it happened they will assume it did, and will go back quite some years as well.

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24th May 2001 13:31

Discredit HMIT and gather your own evidence
The initial observation is that HMIT is assuming drawings are the same each week. You do not say what your client's business is but I suspect it is small and the hint is that it is seasonal in nature.
It follows, therefore, that on the balance of probabilities, drawings fluctuated each week so the starting point for HMIT argument is discredited.
Ignore HMIT arguments and workings at this point because you can discredit them. Take the initiative and construct your own cash flow for a sample period using the data you have. You appear to have a record of cash sales, you will have the bank statements so will be able to check what cash/cheques have been banked and you have purchase invoices so you can establish cash expenditure. Your only missing figures will be drawings and cash on hand at commencement. Assume starting cash is nil unless you have a reasonable, supportable, estimate and so your balancing figure will be drawings.
Having got this far then review the drawings against known lifestyle.
You will then be in a position to demonstrate to your client that he has a problem and negotiation with HMIT would be advisable or have the evidence to return to HMIT to persuade him that, on the balance of probabilities, the accounts are correct.
Of course this will entail some time consuming work for which your client should expect to pay.

If you decide to go to appeal you need more than a simple argument that is little more than "honest guv. I'm innocent.Please believe me". You need to step back and consider what you are trying to prove and decide what needs to be done to do this.Always remember that the standard of evidence is on the 'balance of probabilities' not 'beyond all doubt'

Peter Howarth
Author;Tolleys Tax Investigations

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By admin
24th May 2001 10:45

Mr Tax's comments
I am aware of surveilance operations carried by the IR even in none SCO situations.

Its time to hide your clients rolls royce and cancel the purchase of the luxury yacht!

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23rd May 2001 23:10

Statement of Assets
Have the IR requested statements of assets at the beginning and end of the period under review. This, together with a comprehensive review of the trader's lifestyle/spending etc would give a good indication of the likely drawings levels required to finance his lifestyle. Back it up with personal expenditure proofs (i.e. groceries bills, holiday invoices, etc etc) and you could either show the IR's drawings figures are artificially high or artificially low, hence helping to prove or disprove their contentions. From my experience, this form of proof of drawings is common with IR investigations.

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