Autumn sees the arrival of the renewal date for the RNS Tax Investigation Fees insurance.
Partner Karen Lyth considers how the costs of a tax enquiry can soon mount and also considers what to expect should you be called to a meeting with HMRC.
HMRC's dash for cash
The number one key objective for HMRC is to “maximise revenue”.
Over the last five years HMRC has achieved some success in reaching this goal, with the compliance yield delivered in 2016/17 £10.3bn higher than it was just five years previously.
The vast majority of enquiries are selected by HMRC’s ‘snooper computer’ called Connect, which brings together all that is known about a business and risk assesses the information to determine whether an investigation should be launched.
Over recent times, HMRC has been particularly focused on VAT inspections and PAYE reviews, as well as tax investigations.
This has led to ‘cross-tax’ enquiries, where HMRC handles all three at the same time, so a business owner can be confronted by a Tax Inspector, a VAT Inspector and a PAYE Inspector all asking questions about different accounting periods and tax years.
Any type of HMRC enquiry does not just mean a lot of worry and extra work for you, rummaging around in your garage or loft for historical paperwork.
It also means working closely with us, as we help the tax inspector understand how the data in your business records has been converted into figures in your accounts.
We also have to explain any technical adjustments we have made in your Profit and Loss account or Balance Sheet for items such as prepayments and accruals.
From the moment the dreaded enquiry letter arrives, professional fees are incurred:
- Checking HMRC is entitled to investigate the tax return selected and the enquiry window is still open
- Ensuring the tax inspector only asks for information and documents relevant to the enquiry year
- Responding to telephone calls, emails, letters, compliance fact sheets and notices issued by HMRC
- Providing supporting information from our link papers when your accounts were drawn up
- Preparing for and attending face to face meetings with the inspector
- Debating any obscure or technical tax cases raised during the enquiry
- Handling any settlement negotiations all the way through to a successful conclusion
Of course those are just the fees for responding to HMRC. We will also be talking to you regularly, answering your questions and keeping you informed of our discussions with the inspector.
It is also not uncommon for tax inspectors to change during an enquiry, which can lead to additional fees, assisting the new inspector to get up to speed.
It is easy to see how fees can escalate rapidly, so subscribing to our Tax Investigations Service is a cost effective measure to take.
During the course of a tax enquiry, an inspector will nearly always ask for a face-to-face meeting with you.
Various reasons will be given, such as the meeting is a fact-finding exercise, or it is needed to help understand some figures in your accounts or on your tax return, or even to discuss some third party information HMRC has received.
As you would expect, meetings with tax inspectors can be daunting, even if you ask for an agenda beforehand.
In response to an agenda request, inspectors will usually say the topics covered will depend on the answers given, so it is impossible to provide a list of specific questions.
However, this is a typical format:
- Introduction – where the inspector will explain HMRC’s right to enquire into a tax return and invite a voluntary disclosure of any wrong doing or mistakes
- Nature of trade – where questions are asked about opening hours or hours worked during a typical week, how customers are attracted to the business such as through advertising or word of mouth recommendations and the roles any staff or contractors perform
- Business economics – covering the pricing policy for goods sold or the hourly rate for services provided, details of any beneficial terms offered such as discounts or fixed price work
- Business records – how the goods sold or services provided are billed for and payment recorded, how expenditure is allocated and any private use adjustments made
- Cash and banking – where cash payments are recorded, whether all cash is banked or, if not, what it is spent on, which bank accounts are used for business purposes
- Lifestyle and means – what other income is received into the household from family members or from benefits or investments and how that money is spent
Most inspectors will wait until these agenda points have been covered in depth, before they make their challenge and say what they think is wrong.
It is rare for an inspector to make an insinuation or accusation of wrong doing at the outset, before they fully understand the business and the lifestyle of the business owner or director.
It is not unusual for inspectors to ask the same question twice, but phrased slightly differently, just to test whether the answer provided to begin with remains the same.
Although this is just a brief overview of a face to face meeting, it is evident there are many potential traps to fall into and the opportunity to make a mistake.
Again, this is another reason for subscribing to our Tax Investigation Service, so we can be there to support and guide you with your answers.
For more information about the RNS Tax Investigation Fees insurance contact Karen on Brigg (01652) 655111.