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Big Brother is a RIAT – How Tax Returns are Selected for Investigation

Big Brother is a RIAT – How Tax Returns are Selected for Investigation
“RIAT” is yet another acronym invented by HM Revenue and Customs, who like all government departments, love to use a private language to describe their activities. It stands for “Risk Intelligence and Analysis Team”.

 

There are several RIATs around the country, and their job is to collate intelligence on taxpayers’ affairs so that the inspector opening up an Enquiry into a tax return has as much data as possible about his target.

 

The existence of these teams, and an insight into how they do their work, was the subject of a fascinating article in one of the professional journals recently.

 

The author obtained the information as a result of a Freedom of Information Act request by one of his clients for all the information HMRC held on him.  Normally HMRC do not disclose information of this kind.

 

Even to an ex-inspector of taxes like me, the level of resources available to the inspector came as a surprise, though the criteria for starting an investigation do not seem to have changed much since I was on the job. What has changed, however, is the extent to which these criteria are dehumanised and made the subject of a points system rather than individual human judgement.

 

Selection of cases

 

It appears that cases are selected for investigation for one of four reasons:

 

1. Mandatory Central Selection – that is, the local inspector is directed by head office to open the enquiry.

2. Mandatory Random Selection – Some cases are taken at random simply because HMRC have the power to do this and exercise that power on the “use it or lose it” principle.

3. Directed Priority Area – This refers to particular business sectors considered likely to produce results from an enquiry. Unfortunately, the article does not name any of these sectors, but we can assume that cash trades such as pubs and shops would be one example. When I was an inspector in the 1980s, these tended to be locally rather than nationally defined, and my district targeted actors, landlords, and restaurants at various times.

4. RIAT Selection – This is the only one you are in a position to influence, and the point of this article is to alert you to errors to avoid and to things that should be the subject of an explanation in the “white space” on the tax return in the hope of spiking the RIAT’s guns.

 

Risk factors

 

There are dozens of these which are reviewed by RIATs and given the information in the article comes from an analysis of only one taxpayer’s affairs, the following list should not be regarded as exhaustive by any means.  It does however give a flavour of the sort of thing that could trigger an investigation.  What are particularly interesting are the items that are considered ‘high risk’ and ‘low risk’.

 

‘High risk’

 

The items were:

 

• 3 line accounts with high expenses. The moral here is simple – if your business qualifies for the “three line” treatment (for 2007/08, if your turnover was under £30,000) but your expenses are high, do not take advantage of the facility to include just one figure for total expenses in your self assessment return – fill in the details.

• An incorrectly computed loss relief claim. Don’t make mistakes!

• Apparently low amount of money to live on. This is the classic reason for starting an investigation – I once investigated a used car dealer who, if his books were to be believed, had less than £800 to live on for the year. If your return shows little disposable income, put an explanation in the white space, showing how you managed to make ends meet.

• Incorrect claim for pension premium paid. Again, don’t make mistakes!

 

‘Low risk’

 

Bear in mind that even though these are described as ‘low risk’, they are nevertheless factors that may influence HMRC to open an enquiry:

 

• Losses. Not much to be done here, but again, use the white space to explain.

• Drop in turnover from earlier years. This is especially suspicious if the expenses have remained the same, and cries out for a comment in the white space.

• New claim for pension payments. Nothing to be done here.

• Employment and self employment income in the same return. I don’t understand this one – I can only assume it refers to employment ceasing in the year and self employment starting, leading to a suspicion that the “self employment” is really disguised employment with the same person. I hope so, because my own tax return includes self employment (as a partner in my firm) and employment (as a non-executive director)!

 

Other information

 

It appears that when doing their risk analysis, RIATs use the CitizenView system on the Experian site which is a government data system accessing all kinds of other databases, such as the electoral roll, court records, and so on.

 

They also have access to their own database called ‘TPI Datamart’ which contains information gathered from financial institutions and others, using information demanded under Part 3 of TMA 1970.  The kind of information held would include details of interest received by the taxpayer from all UK and some overseas banks, payments in to and out of ISAs and other tax free investments, pension contributions, and any information obtained under section 16 TMA 1970 (which requires ‘every person carrying on a trade or business’ to give (if required to do so) details of payments made for goods or services to third parties).

 

Means test

 

The information package provided by RIATs to the Inspector taking up the tax enquiry includes a crude form of means test based on the 3 years’ returns before the one under enquiry, based on all income and outgoings revealed by the tax return, and any other of the data sources already referred to.

 

Conclusion

 

The information referred to above is apparently all collated automatically at the touch of a button, so it is important not to underestimate the amount of information that an Inspector opening an enquiry will have.

 

The importance of clear explanations in the tax return cannot be overstated. In my firm, we routinely analyse the accounts we are about to submit on behalf of our clients in comparison with the previous year, and if there are any marked deviations, we get an explanation from the client and include it in the “white space”. This does not guarantee there will be no Enquiry, but at least we can hope that when the inspector is considering which case to select for Enquiry, our clients will not be at the top of the pile!

 

James Bailey