Ronnie Ludwig offers some timely advice for those facing HMRC enquiries.
Since the introduction of self assessment in 1996, HMRC has been retraining its staff to develop investigatory skills rather than deal mainly with compliance and the preparation of assessments, as was previously the case. This new focus of the Revenue and certain developments over the last year suggest that the number of tax investigations, which may target businesses or individuals, is likely to continue rising over the coming months.
The war on tax evasion
During 2009 governments across the world were engaged in a co-ordinated campaign to limit banking secrecy, sign tax information exchange agreements with known tax havens, gain information on any potential tax dodgers and stamp out tax evasion. With tax information exchange agreements negotiated even with the jurisdictions traditionally committed to banking secrecy such as Switzerland or Liechtenstein, HMRC has access to an increasingly wide pool of information and there are few places to hide for tax evaders.
Those who may have unpaid tax liabilities but choose not to come forward voluntarily, are likely to see investigations launched into their financial affairs, as tax inspectors attempt to recover revenue for the Exchequer. Britain’s public debt stood at £15.7bn at the end of 2009, and it is clear that the government will need to raise its tax take in order to plug that hole.
The information network
Details of offshore account holders handed over by banks under new tax information exchange laws are not the only reason for the start of HMRC enquiries. The tax authorities assess a wide range of information. For example, they look at gross profits of similar businesses up and down the country and if your income is significantly different from the average, that might trigger an investigation.
A large proportion of tax enquiries, perhaps over 50%, are started by informants - former business associates, jilted lovers and others.
What to do
Tax investigations are becoming an increasingly inevitable part of the fiscal landscape but there are some simple rules which will help you limit the trouble and anxiety associated with an enquiry if not avoid it altogether.
Keep good records
Good records are essential to running a business as well as keeping an individual’s financial affairs in order. They will also be a great help during tax investigations. You need to ensure (especially if yours is a cash business) that your books are carefully maintained, with all transactions properly logged and recorded so that should you or your business ever be subject to a tax investigation, you will be able to respond to all queries and provide all information requested. By law, self-employed individuals are required to keep all records pertaining to their tax return for five years from the filing date, and those whose tax is deducted through PAYE must keep records for 12 months from filing date.
Under the Taxes Management Act, HMRC has the right to request information from you or a third party (e.g. your accountant), and you are obliged to cooperate. However, cooperation is not just a matter of legal necessity - it can also significantly help your case. Timely responses to HMRC enquiry letters, providing all the information requested can help resolve an enquiry early on before it turns into a full-scale investigation, saving you a great deal of trouble.
Cooperation can also be rewarding in purely monetary terms as any penalties imposed can vary significantly depending to the extent to which you demonstrated a willingness to come forward with information and cooperate with HMRC investigators.
Seek quality professional advice
Having a good professional adviser representing you will, in many cases, help you avoid becoming the target of an enquiry in the first place. If you are facing a tax investigation, the help of an experienced professional who has a good reputation with HMRC will be invaluable in dealing with any enquiries.
Ronnie Ludwig is a partner at top 20 accountancy firm Saffery Champness