THE greater resources deployed by HM Revenue & Customs to counter tax evasion in recent years have yielded dramatic results. According to its latest figures, the revenue generated by counter-evasion work has increased from £1.13 billion in 1991-2 to £9.17bn in 2006-7.
But while the published statistics suggest that the scale of tax evasion is continuing apparently unabated and on a massive scale, not everybody who is investigated by HMRC is guilty of tax evasion. In many cases a simple mistake can be to blame or there may have been a misunderstanding of how the tax rules, which can be very complex, are applied. In other cases, people can simply be randomly selected for investigation.
An investigation by any one of HMRC’s investigative agencies can have a highly destabilising effect. Most obviously there is the risk of substantial financial cost to a business or its proprietors, and an investigation may well proceed over several years, distracting the owners from the business and causing untold anxiety not only to them but to their families.
HMRC has access to a huge amount of information and can compare similar businesses operating in the same area. This comparison can in itself be sufficient to provoke an inquiry, with business owners invited to substantiate why their particular business is not making the same profit as comparable businesses in the same area.
But the “innocent until proven guilty” principle goes by the board when dealing with the tax authorities – it is notoriously difficult to prove that you did not do something, and it can be extremely costly to do so. Indeed there are many examples of people simply paying the tax on the grounds that they cannot afford the time and costs associated with defending themselves.
So, what should you do in the event of an investigation into your tax affairs?
Most investigations begin with a simple letter from HMRC suggesting there is reason to believe that your income tax return or business accounts may not be fully complete and inviting you to reconsider these and declare any omissions. The initial reply to such a letter is crucial, as a comprehensive and careful reply can bring an investigation to an end before it has really begun. Co-operation with HMRC is extremely important and, if an error or omission has occurred, full disclosure will greatly reduce both the interest and penalties payable at the end of the process.
Where a very general letter has been received from HMRC and you genuinely have no clue as to where the perceived problem lies, it is possible to telephone the tax inspector and ask him to give you a clearer indication of exactly what he is concerned about. In most cases the inquiry can then be dealt with very quickly and simply.
Although HMRC no longer gives agreement to tax returns, you are entitled to know that a return period has finally been settled. Therefore a window is provided in which HMRC is entitled to make an inquiry to check the accuracy of a tax return. Once the window has closed the opportunity to inquire is lost.
Generally, the fixed filing date for tax returns is 31 January and the inquiry window is 12months from that date, so, for the normal 2006-7 tax return, the inquiry window closes on 31 January 2009. HMRC has the right to begin an inquiry at any time up to the last day of the window but it is not required to conclude it by then. Anybody facing an investigation should take professional advice, particularly if any of HMRC’s specialist investigatory units are involved.
• Ronnie Ludwig is a partner in the private wealth group at Saffery Champness chartered accountants in Edinburgh
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