How to have a Really Bad Tax Investigation
So you’re the subject of a tax inquiry. Suddenly those folks at HMRC who hitherto have been almost impossible to get hold of, are breathing down your neck and showing a vigour and enthusiasm about your affairs that’s making you very uncomfortable. But a ‘tax inquiry’ can’t be too bad, you think to yourself as you slide the letter to the bottom of the “to do” pile and get on with more pressing business.
There are at least 101 ways to make sure your tax investigation is both unpleasant and expensive and putting your head in the sand has to be top of the list. But if you want to make a really comprehensive job of getting it wrong, here are the top 10 offenders of what not to do (and just in case you’re interested, ways to avoid them).
Knee jerk reactions
Co-operation with HMRC is important and if the worst comes to the worse, can make a big difference to any penalties you incur. But beware of knee jerk reactions. Feeling intimidated into saying too much or assuming that it’s just a random inquiry with no substantive base are easy mistakes to make. The chances are HMRC have done their research and ex-wives, disgruntled business partners and thoughtless disclosures by other businesses which feature you in their tax returns all make for rich pickings.
Before you react to an inquiry or a request for information, keep calm and take expert advice as soon as you can. You’re going to need an informed and considered strategy before you respond, and you probably also need greater clarity about the scope of the inquiry.
Stick with your current accountant
Well, after all, it’s his work that’s got you in this mess so he might do a deal on fees. If that’s your approach, think again. Dealing with HMRC requires a certain type of accountant. They need to have a high level of experience and skill dealing with tax investigations for a start including a thorough understanding of tax law of course and, equally important, of the procedures and legal framework that HMRC have to follow. This latter can make all the difference if HMRC step over the line of what’s permissible (and they frequently do).
But your accountant also needs to be proactive and a tactician. Interpretation of tax law and tax avoidance schemes is often very subjective, and you’ll need someone who is more than capable of standing up to HMRC and negotiating your position with skill. A new accountant can also bring a fresh perspective to an issue and you may find it easier to be full and frank with a new face on the team.
Lack of disclosure or over-zealous disclosure
HMRC have a right to inspect certain documentation and take copies and / or some original documents. But there’s a fine line between co-operating in this process and simply handing over all your digital and paper-based files (which in turn can open up an unnecessary can of worms).
Carry out some due diligence as to what you should or must disclose. It may, for example, be worth providing an explanation of your business model first to help narrow the area of inquiry and clear up any misunderstanding. You also may be able to argue that you need certain documents in order to run your business, or it may just be that the inspector is requesting more than is reasonable or than he is permitted to ask for. Having a savvy accountant to advise you at this stage is very important.
Fix the books
You find that you can’t substantiate the paper trail although you know at the time the transaction in question was dealt with, it was all above board. So why not just generate the required documents now?
No! Any sort of lie or dishonesty will almost certainly be found out and the damage to your credibility is irreversible and could in fact fast track you to a prison sentence. Similarly, never destroy evidence or make a partial or misleading disclosure.
Being poorly prepared for a meeting with HMRC or attending on your own
Meeting with the tax inspector is an important part of your inquiry and one that’s easy to misjudge. Poor preparation, losing your temper, saying too much or trying to be clever are all almost certain to make matters worse.
Open ended questions are designed to catch you out and can lead you into giving too much away. Feeling put on the spot or answering questions that demand careful consideration and shouldn’t be answered based on memory alone can also do untold damage.
The meeting can be exasperating, intimidating and intense, drilling down to the fine details. Trying to negotiate without an experienced accountant is little short of complete folly.
Consider getting someone to take notes of the meeting or record it, and make sure you don’t just sign off the minutes from HMRC when they arrive.
Assuming previous years’ returns are beyond inquiry.
If you’re found to have been fraudulent or negligent, then HMRC can and may open an inquiry into previous tax returns going back several years, even though they were filed over 12 months ago.
Accepting HMRC’s business model of your business
If there are gaps or omissions in your returns, HMRC may well put together a business model or assessment in order to estimate what and how much is missing. However, although at first glance, some business models can make for compelling reading, they are still likely to be based on assumptions and assumptions are open to interpretation. Expert advice is essential before you reach any agreement.
Panic about deadlines
It may feel like HMRC get to play by one set of rules and you by another, which results in them requesting that you disclose onerous amounts of material in a very short time frame.
Don’t be bamboozled. If what they’re requesting is unrealistic, tell them so and provide them with your own timetable for compliance. Again, if this is being dealt with by a specialist tax investigation accountant you may find this carries more weight.
Hold out to the bitter end
You can hold out to the end but if you know or suspect some tax is going to be found as owing by you, a payment on account will at least limit the interest you pay and will also score points when it comes to the issue of co-operation. Clearly, however, you need to take professional advice on this first.
Prevention is better than cure
Sometimes a tax investigation is inevitable, and you may just have been picked at random because of your earnings or because you’re in a particular industry that’s seen as high risk. And there’s little you can do to prevent this if it happens.
That said, there’s plenty you can do to minimise the risk. Don’t file tax returns late is the best starting point and make sure they’re properly prepared with all the requisite documentation to support your figures. If, for some reason, there’s an anomaly in your return, such as a sudden drop in profit or an unusually large VAT claim, take the trouble to explain it in your return.
If your finances are complex and or include complex personal wealth, don’t rely on the company accountant whose remit is very different to tax planning, returns and advice.
Finally, don’t die and don’t do it again
Tax inquires don’t die with you so unless you really don’t like your family and personal representatives and want them to endure a tax investigation after you’ve gone, death is not the answer. And once it’s all done and dusted and you breathe a sigh of relief with your trusted accountant, remember, don’t do it again. Tax planning and well compiled returns have got to be easier than the stress that you’ve just put yourself through.
So, if the brown envelope is sitting on your desk, or you think it may be on its way, get advice now and give yourself the best possible chance of an early and cost-effective resolution. call us today.
