Expert tax advice. Maximum advice for minimum expense.
July 6th, 2010 by Chris Chadburn. Categories: Tax Reports
What are the circumstances in which you should consider a buy-back and how do you go about it? See Penny Bates’ First Principles article in this month’s Tax Adviser.
November 17th, 2008 by Chris Chadburn. Categories: Tax Reports
1. Do your best to avoid your client’s return being picked up for detailed enquiry. It will be almost certain that the enquiry has been launched following a detailed risk assessment and you should be at least broadly aware how that works. It’s not easy but you need to be systematic in trying to ensure you and your staff avoid mistakes in providing advice and producing returns etc. Similarly you need to pay particular attention to the aspects on the return that are likely to be of interest to HMRC. Are further explanations desirable or necessary?
2. Whatever your views on professional fees insurance you should make sure that your clients are aware that products are out there and can be of great assistance if their unlucky number comes up. Avoid the difficulties of the client finding out from a third party when he’s already paid substantial fees getting the problems sorted out. “Why didn’t you tell me about this insurance?”
3. The first stage of defence for most clients will be the maintenance and retention of a good set of books. Although the enquiry will have been carefully selected, in most cases the inspector will not have an open and shut case and will be looking to punch holes in the credibility of the records. This validates the taxman’s pursuit of detailed information on private finances and the operations of the business. The new laws on record keeping and the power to inspect business records (not just PAYE and VAT) will be a key factor in the future selection and working of cases. Your clients need to know about these radical changes.
4. Be clear what your client will want to know when the “I am writing to tell you that I intend to enquire into ..” letter drops on the doormat. FAQ’s are:
The relevant Code of Practice will be a useful framework to address their concerns but you will need to put your own emphasis on the key points and agree a strategy as soon as is practical.
5. Be clear on what information the inspector can legitimately request. Opening letters tend to be lengthy and formulaic. In your view is the information being sought “reasonably required” to enable the return to be checked? A decent rule of thumb is that if there is anything being requested beyond the books and records you used to draw up the accounts and return then the inspector should be setting out why it is considered the information is needed. So if the private bank statements are requested then the taxman will probably say (if pushed) these are needed as means are an issue. If price lists, appointment books and the like are requested the reason will probably be because they don’t like the gross profit rate or similar ratios. Is the inspector’s line reasonable? What exactly are the issues? You should be looking to identify and focus on the perceived risks as far as HMRC are concerned.
6. Times may be changing in relation to understanding where the inspector is coming from and your response to requests for information and meetings. At the end of April 2008 HMRC ended a trial rather clumsily called “Openness and Early Dialogue”. The idea was to be open with the reasons for the enquiry and to discuss key issues in relation to records; their initial review and conclusions over a relatively short period of time. Six months after the end of the trial there has been no official feedback but if these ideas are implemented then your degree of active co-operation needs to be carefully considered. The draft Codes of Practice on the new records inspection regime indicate this is the road they are going down. Much will depend on your view of “working together” with HMRC both generally and in relation to specific officers.
7. Think about penalties from the outset. The present system has been around forever and was heavily criticised by the National Audit Office for not doing enough to encourage miscreants to disclose and proactively co-operate. In decent cases penalty levels were generally 20% to 30% of the tax lost. The new system is going to substantially increase the general levels where the disclosure is prompted with minimum levels of 15%, 35% and 50% where the inaccuracy is (respectively) careless, deliberate or deliberate and concealed. These levels will only be achieved if there is the highest level of co-operation and disclosure. The new regime operates for return periods starting after 31 March 2008 and it appears it will not be retrospective. Again your clients need to know about these changes.
8. Flag up any significant financial problems of the client at an early stage. Whatever the strength of the inspector’s case it is a waste of everyone’s time arguing about correctness of the return if it is clear that the client is in a poor financial position and there is no way he could fund any settlement. This is not just about liquidity but if the reality is that income is low and net assets minimal then at the very least the pressure should be on to cut to the quick and get the issues sorted out without fuss. The same goes for serious illness of the taxpayer or close family.
9. The inspector will undertake a review of the information provided and often their response will be to say they need more details and look for a meeting with you and your client. You need to seriously consider whether a meeting is the best way forward for your client. The taxman should be setting out the concerns both specific and general at this stage although experience shows that inspectors have an increasing tendency to keep their cards close to their chest. These will relate to any or sometimes all of the following:
There is no obligation to attend a meeting and the less open the inspector is about the perceived “risks” then the more inclined you should be to insist on the matter being dealt with by correspondence. It may be a pain to deal with the 8 page letter but at least you can consider with your client the specific queries and the general thrust in your own time; with proper research and in a calm atmosphere.
10. Ensure your preparation is thorough if you are going to have a meeting. The key to this getting a proper agenda from the taxman and focusing on what you perceive as the key issues. If they say they want to know more about the business then what do they want to know? You will invariably find if you push for detail then you will find that a large element of what they want to talk about can be more effectively provided in a concise note. This enables everyone at a meeting to focus on the matters that can be best dealt with at a meeting. The real reason HMRC is keen to meet is that they can then get your client’s answers on the record before they and you are clear on the significance of some key questions. For example, the inspector will be very interested in cash. Who handles it; what’s spent; what’s banked; what’s drawn and what’s kept. Is there a safe? What’s in it? What’s the most cash on hand you’ve had? What’s the most cash you’ve ever spent at any one tiime? What do you generally use cash for? Etc etc.
11. Negotiate. There will be plenty of black and white areas in terms of what the inspector wants but most of them will be grey. Working together makes sense but it takes two to tango. Be assertive form the start, not to prove a point but to show the inspector you’re well aware of his powers and more particularly the limits of those. The meeting is a good example. The inspector will often suggest a time and date and location. This is your call and the place you meet as well as the time and date are ultimately your call. Similarly with requests for information. Unless the inspector has a very strong hand do not willingly agree to providing, for example. private bank statements.
12. One way or another the inspector is likely get more information and at some point will have set out the case against your client. This may be a simple explanation with the threat of assessments and determinations. You need to consider in detail your respective strengths and weaknesses to determine how you move the case forward. This is really just a part of the negotiating process. If you accept that the inspector has a good case you should discuss with the client whether a disclosure needs to be made or whether you should take a proactive approach. “We understand where you are coming from and intend producing a report on the matters you have outlined.” The next step should be agreeing with the taxman exactly what needs reviewing and how this can most cost effectively done. The advantages (assuming you do a good job) are many:
13. On the other hand in many cases you and your client will be totally unconvinced by the inspector’s arguments and conclusions. It is no good these days simply making assertions, the inspector is interested in hard evidence. Remember that if you cannot agree it is the Commissioners not the inspector who has the final say. The Commissioners or Tribunal will make their decision on the balance of probabilities having heard all the evidence and inspectors need reminding of this. If you haven’t got a contemporary bit of paper the taxman’s knee jerk response is to say “..there is no evidence, I’m disallowing the expense..” or whatever. At the very least you potentially have evidence from your client (or others) in the witness box and invariably simple witness statements can be supplied by staff, suppliers or whatever. What has the inspector got beyond assertion?
14. You need to be able to counter the taxman’s business economics arguments. A common approach in smaller cases now seems to be to undertake a half-baked audit; discredit the records then re-compute the profits in line with similar trades on the basis of the records and “the information provided by your client at our meeting.” The first point to address is whether the records really are weak. The requirement is for records to be kept that enable a correct return to be made. The records may not be perfect but are they fit for purpose? A critical analysis of the business model involves resolving the following queries:
HMRC’s Enquiry Manual acknowledges this is all broad brush stuff and conclusions should be checked against the likelihood of this business generating this level of income and the proprietors spending or investing this sort of money. Such checks are often conspicuous by their absence.
15. As with business economics you need to know how to establish that your client’s private finances stack up. In larger and more serious cases this is the area that is usually the main focus as despite the problems in establishing a private expenditure level there is a high level of factual content to the approach. That is to say bank or credit card statements; completion statements; invoices for car purchases or sales etc. If they do anything on the private side inspectors draw up a simplistic means test that is OK for very straightforward cases but totally useless in all the others. The more detailed approach looking at the paperwork in detail is time consuming put can pay big dividends by ensuring that the following are identified:
That leaves the cash position which is really done by elimination and a judgement as to whether the cash apparently available can reasonably be expected to cover the expenses likely to have been paid in cash. Avoid the client completing HMRC private expenditure questionnaires at all cost.
16. Be aware of the consequences of HMRC treating operators in the Construction Industry as very high risk. Any recent and significant compliance failure of the business or the proprietors may prove very expensive. This is not only in terms of tax, NIC, interest and penalties but also the loss of Gross Payment Status where over 100,000 subcontractors do not suffer the 20% deduction. This is now subject to a rolling review and recent figures shoe that of the 62,000 taxpayers reviewed almost 30% lost their right to receive gross payments. Relevant clients need to be aware of their responsibilities and to be dealing with them on time and accurately.
17. Remember that PAYE audits and the like are risk assessed like other “interventions”. Prime target areas are:
Employers are often persuaded to pay the tax due from the director or employee in relation to expenses and benefits and penalties are waived in these circumstances. The flip side is that the income tax will be grossed up to pay tax on the tax and NIC that is being paid on the employee’s behalf.
18. Are you happy that you are not out of your depth in a particular investigation? Advising in these situations can be very high risk for the advisor with substantial amounts involved and the possibility (no matter how slim) of prosecution. Particular points to be aware of:
19. The cost of litigation can be high but where your client has a defensible case HMRC should be clear that if agreement cannot be reached you will take the issue to the Commissioners or Tribunal. The taxman is likely to be bullish on the merits of their arguments and your role is to stand up to this pressure. The bottom line for both sides is that the likely costs are weighed against the risks of winning and losing. Usually both sides will be able to settle on something they can both live with but brinkmanship is the name of the game. Be aware of HMRC’s Litigation and Settlements Strategy which can limit the scope for negotiation in all or nothing situations.
20. Recognise and focus on the key factors to minimise your client’s settlement. This is where your negotiation skills are fully put to the test in relation to agreeing:
The first 3 elements are critical. On penalty loadings you need to take a long hard look at the papers to form your own view on the disclosure, co-operation and seriousness. The taxman tends to take a broad view on this but you will often find for example that there are a mix of understatements many of which may involve low or no culpability. Remember inspectors have been trying to up the general levels of penalties in recent years
Ned Flanders offering his ever-optimistic views on tax.
I came across a nice cartoon in The New Yorker.
Exasperated couple surrounded by paper.
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