Q. Being in business you constantly hear comments with regards to H M Revenue & Customs (HMRC) and the threat of a tax enquiry. What are the chances of HMRC contacting me and opening an enquiry into either my business or myself?
Ben Chaplin, Managing Director of Peninsula TaxWise responds:
A HMRC have an ever increasing array of powers that enable them to not only open a formal tax enquiry into the submitted tax return of a business or individual but now have, under the latest extended provisions, the right to carry out “in year compliance checks” across the full spectrum of taxes. The increase in powers and options available to HMRC raises the opportunity for investigation and the risk of exposure for the taxpayer.
Under the old enquiry system HMRC relied on three main areas to select businesses for an enquiry once a tax return had been submitted and the methods listed below still apply today.
• Pot Luck - The Revenue select a certain number of cases to make aspect or full Income or Corporation Tax enquiries, on a purely random basis.
• Third Party Information - The Revenue will select cases based on third party information. For example, this can include a tenant informing the Revenue of the amount of rental income they pay, when making a claim for tax credits or social security payments. An aggrieved spouse or ex partner, dissatisfied customer, jealous neighbour, the list is endless.
• Computers and Statistics - The Revenue has another tool in their armoury, and this is the statistics they have built up as a result of the self assessment system and the computerisation of records. They now hold a database of several hundred thousand records for any type of trade or business, and their computers automatically flag for enquiry any entries in a Return that fall outside the statistical norm.
In the past all the above options would be considered once a tax return had been received following the end of the tax/financial year in question. Under the new powers of inspection HMRC can also carry out “in year checks” to ensure tax is being accounted for correctly and that book keeping is appropriate in real time and not after the event. This enables HMRC to visit a larger number of businesses and perform more in depth reviews.
The introduction of these in year compliance checks extends HMRC powers beyond the previous scope of just the PAYE & VAT visits that most businesses have dealt with in the past. The new remit also allows them to review the business books and records in year, in most cases with 7 days notice, to review all areas of taxation principally Income & Corporation Tax.
The alignment of these new powers of review with the new penalty regime that has been introduced means the potential costs to businesses who do not ensure that full and correct records are kept at all times could be substantial.
This new tax compliance regime and the associated increased risk in investigation is leading an increasing number of businesses and individuals to seek protection from expensive accountancy fees through tax enquiry insurance. For an annual premium the potential accountancy fees incurred in dealing with a tax enquiry, up to £75,000 in any one claim, can be covered relieving some of the worries at a time of great stress for most people.
For more information about tax investigation and the likelihood of your business facing an enquiry from HMRC, call the TaxWise Advice Service on 01455 852570 and one of specialists will be on hand to help.