Despite only involving £2,530, the case developed into such a nightmare that the taxpayer set up a website (www.tax-hell.co.uk) dedicated to describing his experience and warning others of the tactics used by HMRC.
So, if like Nick you find yourself the subject of an HMRC investigation, what can you expect and is there anything that can be done to prevent you from entering your own tax hell?
Making an Enquiry
HMRC have wide powers to make enquiries into a tax return. Enquiries can be made into a return for a number of reasons. HMRC may enquire into the whole return of a self-employed taxpayer, or into one or more separate items on the return. They may enquire into claims not on the return or into the whole return of a taxpayer who is not self-employed. A return may also be selected for enquiry on an entirely random basis, in which case the taxpayer is just unlucky.
As far as self-assessment returns are concerned, HMRC currently have 12 months from the filing date in which to make an enquiry into a return. Thus, for 2007—08 tax returns, the enquiry window runs from the actual date on which the return was filed until 31 January 2009. For 2008—09 returns, the enquiry window runs for 12 months from the actual filing date. HMRC maintain that the date on which the return is submitted has no bearing on the likelihood that the return is selected for enquiry.
Where a return is selected for enquiry, the first that the taxpayer will know of this is when they receive a letter from HMRC. HMRC will also write to the taxpayer’s adviser if they have one. The taxpayer will receive the letter before the expiry of the enquiry window. If a letter is not received by this date, the return becomes final and conclusive, unless there has been incomplete disclosure, fraud or negligence, in which case longer time limits apply.
Once a return is the subject of an enquiry, HMRC will ask the taxpayer for information in order to check the accuracy of the entries into the return. The exact information requested will depend on the nature of the enquiry. If the taxpayer is self-employed and HMRC are looking into the return of a self-employed taxpayer, they will want to look at business records and also at entries relating the rest of the return as the taxpayer’s overall financial situation is often linked to the success of the business.
Once the officer has looked at the books and records to see how the figures have been arrived at, he may have further questions for the taxpayer. These queries are usually addressed at a meeting.
If the enquiry is into specific entries on the return, the taxpayer will be sent a letter setting what it is HMRC want to know. They may want receipts to support a particular item of expenditure or they may want more information as to how the taxpayer has arrived at a particular figure.
HMRC may also enquire into a claim made outside the context of the self-assessment return, such as a claim for a tax relief or allowance. Again they will send a letter to the taxpayer asking for the information and documentation they require in support of the claim.
If the matter is not quickly and easily resolved, it is best to seek professional help as this may prevent things spiralling out of control. Choose an accountant with experience of investigation work who is familiar with the tactics involved. Although professional help may seem costly and the taxpayer may be tempted to handle it himself, this might not be advisable as good professional representation can ultimately save money and a lot of stress.
Where professional help is sought, the adviser can correspond with HMRC on the taxpayer’s behalf, attend meetings either with or instead of the taxpayer and negotiate any settlements. Having someone on hand who is familiar with the processes and is experienced in dealing with HMRC can reduce much of the stress inherent in an HMRC investigation.
Minimising the Pain
An enquiry into a tax return is unlikely to be pain-free. As Nick Morgan’s experience showed, they also have a tendency to drag on, even where the sums involved are relatively small. However, there are some steps that can be taken to improve the likelihood of resolving matters in a timely and relatively stress free manner.
It is advisable to be co-operative at all times and to provide the information requested in a timely manner. Co-operation will count in the taxpayer’s favour when negotiating a settlement. If income or gains have been omitted from the return it is better to come clean up front rather than wait until HMRC eventually discover them. Again, HMRC will take into account the extent to which the taxpayer has freely and fully volunteered information when reaching a settlement.
A professional adviser will be able to give guidance on dealing with HMRC during the enquiry.
Reaching a Conclusion
Once HMRC have finished their enquiries into the return they will ask the taxpayer and his or her professional adviser to attend a meeting. At the meeting, HMRC will outline what they have found, set out the amount of tax they think is owed and the extent to which, if any, they believe the underpayment is due to fraudulent or negligent conduct by the taxpayer.
The taxpayer or adviser will be able to give their side of the story.
HMRC will them tell the taxpayer the maximum penalties and interest that they could charge and explain that it is normal for the taxpayer to offer to pay a single sum to cover the tax, interest and penalties. The taxpayer will be asked if he or she is willing to make an offer.
This is where a professional adviser can be worth his or her weight in gold. The interest and tax are non-negotiable. It is only the penalty figure that is up for negotiation. The starting point for the penalty is 100 per cent of the tax underpaid or paid late. This is reduced as follows:
Disclosure – normally up to 20% but may be 30% for a full and voluntary disclosure where there was no fear of early discover by HMRC;
Co-operation – a reduction of up to 40% for supplying information quickly, attending interviews and paying tax on account when it becomes clear tax is due; and
Seriousness – a reduction of up to 40%, depending on the seriousness of the offence, taking into account what the taxpayer did, how long it went on for and the amount of money involved.
HMRC will have a figure in mind and will comment on the figure suggested by the taxpayer.
If agreement is reached the taxpayer is required to sign a formal letter offering to pay the agreed sum within the stated period. HMRC will issue an acceptance letter. The exchange of letters constitutes a formal contract.
If the taxpayer does not make a letter, HMRC will issue a notice of closure. The tax due will be shown on the next statement of account.
The taxpayer can appeal if he or she is unhappy with the conclusions reached or the tax that HMRC think is due.
If the taxpayer is unhappy with the way in which the enquiry is being handled, they can ask the appeal commissioners to consider whether the appeal should be closed, Details of the complaints procedure is set out in COP 11, available on the HMRC website (www.hmrc.gov.uk/leaflets/cop11.htm#1).
Better Luck Next Time
Although little can be done to protect oneself from a random enquiry, there are steps that can be taken to keep HMRC away from the door. Returns should be sent in on time. All attempts should be made to supply accurate and final figures – provisional figures should only be used when there is no other option. If provisional figures are used, the taxpayer should make sure that HMRC know which figures are provisional, explain why final figures are not available and let HMRC know when final figures can be expected.
If the taxpayer finds a mistake in the return after it has been submitted, honesty is the best policy. It is better to tell HMRC and to correct the return than to lie low and hope they don’t notice.
Despite all this, there are no guarantees of escaping a tax nightmare. But, as they say, forewarned is forearmed.