THE Revenue is constantly telling us that “tax doesn’t have to be taxing”. So,
like more than 4m of us, I completed my own self-assessment return and when
I got a letter saying an inquiry was being opened into my tax affairs I
wasn’t frightened – I had nothing to hide. What a naive fool.
No detail was too small to question. A £10 David Beckham autobiography –
bought for research – quickly became of great interest. A senior inspector
said: “Are there any documents to show that you purchased the David Beckham
book in the belief that you would get to interview him? Otherwise there is
nothing that shows it was not purchased for your own enjoyment.” This was
only the beginning.
The inspector presented me with a frightening blur of figures on stacks of
official headed paper. I was told there was “a lot wrong” with my tax return
and that I was considered to “have shown neglect”.
In January last year I used the 1998 Data Protection Act to get copies of my
Revenue file, which anybody can do. Two months later the true picture of the
investigation emerged. The senior inspector – so bullish on the phone and on
headed paper – admitted in an email to a colleague: “I haven’t insulted him.
Mostly I was . . . trying to make him go away”. And in a separate email she
said: “I’m feeling a bit lost in all this . . . it’s not a large settlement.”
Stephen Camm, a former Revenue man and now head of tax investigations at
accountant Price Waterhouse Coopers, estimates the cost of an investigation
to the taxpayer could be as high as £50,000. And how much tax does the
Revenue hope to get from me? In September, it sent documents setting the
figure at £2,530.
Here are 10 things you need to know about tax investigations and what the
Revenue would rather keep quiet.
1Tax is not simple
Advertising frontman and scientist Adam Hart-Davis, who has been delivering
the “tax doesn’t have to be taxing” line for five years, spoke out in
January, saying the tax system was too complex.
The National Audit Office estimates a third of self-assessment returns are
incorrect – not surprising when a recent civil service review admitted one
in four of us asking the taxman for advice was given “incomplete or
inaccurate information”.
2 Stick to your guns
I put in expenses of just under £4,000. After a year I was told I would be
allowed just £1,000, but I dug my heels in and the figure went up to £3,000.
Camm said. “In investigative cases there has always been a strong element of
negotiation.”
3 They bend the boundaries
When an investigation is opened it’s normally an “aspect inquiry”, which means
the investigator can only look into a narrow band of information. If they
suspect wrongdoing, the investigation becomes a “full” inquiry, and if a
“discovery” is made, the previous 20 years can come under scrutiny.
What constitutes discovery is open to interpretation. Camm said: “It can
appear that the Revenue says it has made a discovery at the drop of a hat;
the trick is to question what that discovery really is.”
John Whiting of the Low Incomes Tax Reform Group, which helps those who cannot
afford tax advice, said: “There are certainly inspectors who will try it on.
You have to understand that they are paid to collect tax, not to help the
taxpayer.”
The Revenue said: “It is in the interests of accountants to suggest their
services are an absolute necessity before engaging with HMRC. The reality is
that 50% of taxpayers are not represented by accountants.”
4 You are guilty unless you can prove otherwise
Unlike criminal law, the burden is on you to prove your innocence.
Let’s say your grandmother gave you a cheque for £100 for your birthday four
years ago. The taxman will look at your bank statements and question where
that amount came from. If you can’t explain and provide proof, they will
most likely assume that the money is undeclared income and you will be taxed
on it.
5 The interview is a trap
In criminal investigations you are cautioned that what you say may be used
against you – no such niceties are offered by the Revenue. You can be
represented – which the taxman is very vocal about– but there are other
rights they prefer to keep quiet about.
You can be interviewed at the location of your choice, you can ask for a
detailed agenda beforehand and you can also record the interview.
Camm said: “An interview is voluntary, but advisable.”
6 The lifestyle questionnaire is given for a reason
If the Revenue can’t find any evidence, it will simply look at your lifestyle
and calculate that it comes from an income of X. It knows your declared
income is Y. It will then calculate your tax based on the difference. I was
sent a questionnaire after my first interview. It looked innocent enough so
I filled it in as honestly as I could – but it was little more than
guesswork so I wrote “All figures are estimates” on the first and last page.
That has not stopped the taxman using the figures as one of the main tools
in its investigation.
7 It takes time
The investigation can drag on before the taxman presents a settlement offer.
The settlement may be unfair, but the option is to go on paying high
accountancy fees for months, possibly years.
Michael Reader, former inquiry officer turned author, said: “Accountants
should not allow the client to be subject to any form of unfair settlement.”
The reality, though, is that most accountants are pragmatic and the Revenue
banks on this.
8 The complaints team is an arm of investigation
Whatever you say to the complaints team is noted down, attached to your file
and passed back. They make judgments about how determined you are or if you
are angry. Notes obtained through the Data Protection Act on my case read:
“He said he is prepared to go all the way – even to his MP,” and: “He
sounded agitated and frustrated, but well mannered and polite.”
9 It doesn’t tell you about the power to scale back
You are the subject of a long and stressful investigation, but just when you
are suita-bly stressed and scared, the taxman will dangle a carrot in your
direction. This is a settlement figure that (you believe) will make the
nightmare go away. The figure will be a little higher than you were
expecting, but it’s possible to pay it at a stretch – say £5,000.
Once you have signed on the dotted line, real figures start to emerge. The
£5,000 is backdated, say over five years, making the figure £25,000. Then
the Revenue adds interest (increasing the figure by at least another £5,000)
and penalties too.
So what starts out as £5,000 can quite easily knock a hole in £50,000 – and
once you have agreed to the initial £5,000 the taxman has got you.
This happened to me in the early stages of the investigation. After the case
had been open for a year I got a letter saying, “I’m now in a position to
settle my inquiry and propose the following . . . ” but the figures
contained no mention of penalties, interest or scaling back.
It was only after talking to an accountant that I learnt what would happen. He
pointed to my letter and said: “That figure is just the tip of the iceberg.”
10 It is getting more power
Camm said: “Staff cuts have undeniably increased workloads, lowered skill
levels and undermined Revenue staff’s morale.”
What is the response of the govern-ment? To give them more power.
Rob Lewis, at advice website Account-ingweb.co.uk, said: “The Revenue now has
the power to bug (only in criminal cases) and from April 2009 will have the
right to carry out surprise spot-checks.”
The Revenue said: “The chance of our bugging anyone in a routine tax inquiry
is nil. These powers would only be used for the most serious of criminal
cases. It’s nonsense to link these powers to routine inquiries. We operate
inquiries in a professional manner within codes of practice and within a
framework. Our staff are well trained and act with integrity in a fair and
reasonable way.”
WHAT RIGHTS DO YOU HAVE?
Why does the Revenue start inquiries? The Revenue can inquire into any tax
return at random. It does not mean the taxman thinks it is incorrect.
Officials will not tell you if you have been selected at random.
It will look at either the whole return or at one or more specific areas – an
‘aspect’ inquiry. It can upgrade from an aspect to a full inquiry on the
‘discovery’ of more information. How long does it have to inquire? It
normally has from when it receives your tax return until 12 months from the
filing date (usually January 31).
What information will it need? You must keep your business records and provide
them promptly – failure to do so could result in a penalty. How long will I
be allowed to provide it? Normally 30 days from the request. What about
meetings? The Revenue may ask to meet you to discuss your financial affairs.
You do not have to attend but this could affect any penalty.
If you do not have an adviser you can ask a friend or relative. The meeting
can be at your home or place of work if you prefer.
Can the Revenue inquire into earlier years? Yes, if it discovers an error in
your tax return, it assumes it may have been made before and will adjust the
tax you owe accordingly. Can I appeal? Yes, to the independent appeal
commissioners within 30 days. Can I see my files? Yes, if you are being
investigated and want to see the documents held on you, call the HMRC Data
Protection Unit 0191 225 7575. You can learn more about Nick Morgan’s case
and follow the unfolding events on his blog tax-hell.co.uk
