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Tax Inestigation Second time to dance.

Tax Inestigation Second time to dance.

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A brief summary , my client has gone through one investigation from the 1990 to 1996 , 6 years with an outcome in more-or-less his favour, his car was disallowed from the accounts going back to 1983 when he commenced business, we went through three Inspector's, a district inspector and ended up with an area inspector who informed us that he was on the Ken Dodd investigation, you can tell from a six-year investigation the client had a terrific resilience and had worked for the government in a clandestine environment . Herefordshire been a favourite county?.
Now it has come to pass that we are kicking off with a second investigation, would be interested to here any comments, how unusual is this situation, the client is in the same Business , fish and chips , accounts are a excellent gross profit around 56 per cent records are kept in a excellent manner with no suppression of invoices etc.
Any advice on tactics, greatly received, would you proceed on a harassment bases, or straight to the commissioners. our client isn't looking forward to another six years , hope this doesn't send him over the top, wouldn't like to be around if that happened!

Mark Richardson

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By Appletonmark
30th Dec 2004 23:07

To Dance again update
To dance again update.
Sorry I posted this in the wrong bit and now I've learnt something else, never too old to learn.
Thank you ladies and gentlemen for your comments, and the up date might amuse and inform.
All documents have to be submitted today.
Work carried out, fully analysed cash flow account day by day, running balance never drops below- cash-in-hand, at beginning of year, concluding with a healthier cash-in-hand by £250. Laborious job but one in which Inspector will undertake. Fully reconciled all invoices with the help of client and of his suppliers, physically going and inspecting their records with their consent no discrepancies have come to light, as no doubt the inspector will do! This also puts my mind at rest, as yes I have trusted this client, but confirmation is an extra bonus, Antony is quite correct I am sure this inspector has visited the shop and purchased chips and fish this was done on the first inquiry we have done our own investigation into this, bags of chips per sack of potatoes, fish counted per stone etc and all seems to be OK wastage being the only element that is uncontrollable, but this works both ways as we are not able to pinpoint an exact percentage for our own exercise, well that's not true we are pretty sure. We would certainly not ever volunteer an opinion, this would be left open-ended, would advise anyone else never to give a precise percentage on this issue. On a psychology level I have learned and witnessed a great deal that otherwise might have passed me by. dealing with this client I digress for a moment, the first inquiry coming to a conclusion with the help!!! Of Ken Dodd's Inspector, this inspector wanted to know, out of curiosity what my client did before he started the shop. His reply, is this because my will to win his far greater than you could ever imagine, perhaps that is where I grew up, he had grown up in one of the roughest areas, in which they would steal your coat at the top of the road and sell it back to you at the bottom, the inspector said, you should have bought it back halfway down the road it would have been cheaper, and that's psychology, my client turned to him and said, you get them to steal somebody else's coat in the first place, that's psychology, inspector again asked him what he did before the shop he never got a reply just a smile.

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By Appletonmark
30th Dec 2004 23:05

To Dance again update
Other amusing things happen throughout the investigation, we were on our way down in the lift from our second interrogation, which had been with the district inspector and the original inspector, in the lift was the original inspector, my client turned to him and asked him to conclude his inquiries quickly as the couldn't take much more of this, we never heard from the inspector for eight months, which gave my client the time to visit the record library to amass information, weather conditions throughout the year, city-centre crime, redundancy in the workforce, Business going under and then have them analysed. This was then overlaid on to the takings all fluctuations matching, all good stuff this you know!! One last thing Doddie’s inspector was the only one who asked if my client had a safe deposit box, to which he replied he had and that he was more than willing to let the inspector visit the bank with him. All three of us off to the bank and this was a proper safe-deposit bank, my client, told the lady in charge that this was a top flying inspector and he wanted access to my safe deposit box, she replied, I don't care how top flying he is if his name's not on the authorisation, then is not going anywhere, my client said to him flash your identification badge, the lady replied I don't care what he flashes is still not coming into this bank, it was resolved by a member of the banking staff going with my client getting the box, my client asked the bank official to confirm, nothing had been taken out of the box and when the box was last visited, so we are now in the foyer of the Bank, were my client opened the box and threw a plastic bag at the inspector, and said this is one for your memoirs, the bag contained a rhino's horn the other thing in the box was a gold watch, no cash, the inspectors face was a picture, and am sure mine was to.
Analysing gas and electricity, this was key in the first inquiry, as to prove extra income the inspector needed extra power! Looking at this key issue will be of help to others in this particular line of business
It is a specialised job but once you have the benchmark you can utilise it for many businesses in this category.
Taking the point on board, that they must be something I don't know about, and for the life for me I can't think of what, have sat down with my client, he has not bought any houses, expensive cars, motor launches life assurances Endowment Policies anything that would raise suspicion, in fact his philosophy is to be low profile,

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By Crassus
21st Dec 2004 18:28

Be (at least reasonably) bold and resolute
Providing you are absolutely sure there is really nothing wrong - go public. See if the local newspaper will do a piece about an honest local trader being hounded by the rotten Revenue. This will make the tax men watch their step and may evenproduce some good publcity for the fish shop and your practice.

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By AnonymousUser
23rd Dec 2004 10:58

Fairness To Taxpayer
I'll raise a controversial point here. It is an informed view because of past experience. When a case is selected for Enquiry, I think that initial indignation may be wasted energy and emotion.

The point here is that an inspector's reaction may be that if your client's records are sound and the SA is correct, is not the act of lodging a formal complaint pre judging the outcome?

It is difficult, frustrating, time consuming, but if you client is clean, then he is clean and has nothing to worry about except perhaps "tweaking" tax adjustments?

My own experience is that formal complaints are most effective when timed correctly. If we all believe that proper fairness is afforded when complaints are lodged in enquiry cases, then we shall be in for a surprise. Area Directors and their tax inspectors are very good at "closing shop". Remember, it is an enormous issue internally for an Area Director to not back up one of his fully trained colleagues.

One final technical point here, if a complaint is to be effective when lodged with an Area Director, it must be usually be in connection with a flawed view and application of the law by the tax inspector. Complaints which arise from the circumstances of Mark's case are most likely to be greeted with the response, "If his affairs are in order, lets get the enquiry out of the way quickly then?"

I have to say that my concerns evolve around poor GP% metioned, and my scarcely concealed lack of optimism of the outcome of an enquiry on takeaway shops and restaurants, fuelled by many years of having dealt with them.

If Mark requires any assistance then I can offer some free support in tactical terms in January if he cares to mail my private e mail address on [email protected]

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By AnonymousUser
21st Dec 2004 13:43

It's the nature of the business
I write as an ex-Inspector and currently an investigation specialist. Unfortunately your client's problem is the nature of his trade in that, as your other respondents state, it is a cash trade and one that allows for business economics exercises. Consequently it is the kind of case handed to trainee Inspectors to cut their teeth upon...

I think you will have little success in getting them to back off purely on the basis of the previous enquiry, no matter how mishandled and unjustified that was. You might go through some sparring letters, and even seek the aid of the Commissioners but the result will be that the Inspector will point to his right to enquire into any Return embodied within Section 9A TMA 70.

Your best bet is to keep the powder dry, send in all the stuff that he asks for and wait for him to ask a stupid question, or make a stupid assumption. The likelihood is that the business has already been visited, a portion of chips has been purchased, taken back to the tax office and weighed in readiness for the business economics exercise where they will attempt to calculate the number of portions of chips he has sold from all those tons of potatoes that he has bought. (I kid you not - they do do this!)

Where their calculations are weakest is in the wastage factors - potato peelings, unsold chips that get thrown out, pies past their sell by dates and so on. Another factor with fish and chip shops might be staff pilferage - literally eating the profits or pocketing the cash. It might be a good idea for your client to keep a record of wastage over the next month or so. Unfortunately, Christmas might not be a good time for this but January might see a fall off in trade with higher wastage. Keep us posted of progress or call me if you want a word - 029 20700921. Good luck!

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By AnonymousUser
22nd Dec 2004 10:31

Past experience tells me that the trigger for the second enquiry is likely to be the low GP% if this is indeed only 56%. On a previous enquiry into an Asian takeaway, the Inspector concerned turned up for a meeting saying not only was the national average GP% for takeaway restaurants 70% but that he had access to the reported GPs for other local takeaways, which were all above this threshold.

Much of the meeting, and subsequent correspondence, took the point of examining the reasons for the low GP% which included different portion sizes, pricing structure (he operated a membership club where production of the card entitled the member to discounts etc), opening hours. In the end the Inspector accepted a GP% of around 63%, rather reluctantly.

I can confirm Clive Griffiths comments below about the Inspector's enquiries into the other form of chips.

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By AnonymousUser
22nd Dec 2004 09:08

Chips
I missed seeing this posting Mark. Tony Monger's comments are correct and valid. I think that whilst the initial reaction to a scond enquiry may be one of indignation, if the belief is that your client is still clean, then offload all the records to the inspector, a covering, polite but firm request for urgent special priority to the review against the backdrop of an excessively long investigation previously.

Although the inspector may well indulge in the ususal "chippy/restaurant" mathematical exercises, insist on a proper and clear demonstration of suppression if that is what the inspector believes has happened, not silly suppositions.

However, suppression of takings and purchases does occur in many takeaway businesses. Double purchase invoicing is still commonplace (buys forty 56lb bags of potatoes, gets 2 invoices from supplier for 20 56lb bags, destroys one of the those invoices, sales of chips then suppressed in the year by up to 50%, inspector gets mandate to approach suppliers etc, exposes the supression, GP% etc recalculated, nasty tax bill.

You must first be sure that your client is clean. If so, you can proceed with confidence and keep the inspector under pressure during the course of the enquiry. By the way, I am not sure that 56% is an excellent GP%? I think that comfortable GPs of up to 67-70 % are achievable, influenced of course by mix of sales, and levels of base purchases (rice etc).

One final word, I have had cases where it is not only potato chips the inspector may be interested in. Depending on the nationality of the shop owner, inspectors often express an interest in whether suppression is funding another interest of the owner, involving chips of an entirely different kind!!!

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By AnonymousUser
23rd Dec 2004 09:55

cash trades
As previously stated cash trades will always attract attention.
You have two ways of dealing with this but you have to be 100% sure of your client.
The easy way. Give in to them give them what they want. If clients' records are OK they do not have a leg to stand on.
The hard way. Fight them every step of the way. Go to District then Area Inspector. Write to Gordon Brown and Tony Blair. Appeal to the Commissioners.
Which ever way it must be for your client to decide as he is the one being investigated.
The IR might have made a mistake in the first enquiry which they feel could be rectified in the second so go through the original investigation to see if something sticks out that they missed.

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By halesir
16th Dec 2004 12:24

Second enquiry
Mark
Second enquiry is unusual but not unknown - I had one client who had 3 consecutively (several rented properties & housing benefit problems). Also 6 years to complete an enquiry is unbelievable!

How you approach it depends on how confident (and confrontational) you are. You say "no suppression of invoices". I am afraid I am a little cynical and would probably have said "no evidence of suppression". However you know your client.

I think my approach in this case would be to supply books & records (presumably requested by HMIT), give 30 days and then ask for HMIT to advise areas of concern (if any) or close the enquiry. If you are not satisfied ask for case to be reviewed by his line manager with a view to it being closed.

You need to be aware that HMIT may have something on file which has caused the enquiry or it may simply be an unlucky random selection.

Good luck
Ian

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By Sherlock
16th Dec 2004 13:07

Cash businesses are a 'sitting duck' and easy target for Inland Revenue investigation.

The best defence might be to do your own 'surveillance' of the business, resulting in the production of a business economics model which would impress the Commissioners, if not the Revenue. Time-consuming and costly, though.

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By Peterjet
23rd Dec 2004 12:30

Second Visit
Have you taken into account the Chi Squared theory? Perhaps that is what it not adding up

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By Appletonmark
30th Dec 2004 14:17

To Dance again update
,
Taking up the point of the gross profit this is a standard fish-and-chip shop with no restaurant or exotic foods involved, the Revenue's own gross profit is between 45-50 per cent for such shops bearing in mind this is not on a main road and relies on repeat business rather than passing trade. Chinese takeaways Asian foods have a higher percentage as do most shops the further south we go as they command higher prices , gross profit never mentioned in the first investigation at all.
The business was sold last December 18th, 2003, the opening hours he kept were relatively low compared to his competitors, Monday to Thursday 9:00pm Friday 10:00pm Saturday 8:00pm whereas other shops in the area are open to 11 o'clock and 2 o'clock am in one case, as due to the restrictions on opening hours and his previous shop was open until 3am, so he had dealt with as many drunks as you would wish to see.
Well we will see what comes out of the woodwork, will keep you informed and ask for help along the way am sure,
Wishing everyone a happy Christmas and a prosperous new year
Cheers Mark.

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