Private tutors come under the spotlight after HMRC steps up crackdown on tax evasion

PRIVATE tutors and coaches are in the firing line after HM Revenue and Customs launched its latest campaign to tackle tax evasion.

The HMRC is targeting tutors, coaches and instructors receiving cash-in-hand payments, following the appointment of an extra 2,250 inspectors to tackle tax avoidance. The campaign comes after similar initiatives aimed at dentists, plumbers and eBay traders, while childminders and gardeners may be among future targets.

Tackling non-compliance and eliminating tax evasion has long been an objective for HMRC, and it is bearing fruit. Recent performance reports show that the tax recovery from business investigations by HMRC has easily exceeded £500 million a year in recent years.

Eradicating tax evasion and avoidance is set to remain a priority as the government continues to look for ways to maximise tax receipts in a very difficult economic environment.

But while efforts to identify and tackle unlawful tax evasion are only to be expected, a crackdown on tax avoidance has been identified as one of HMRC’s priorities over the coming years.

We can, therefore, expect to see a lot more new anti-avoidance legislation in coming months as well as a further increase in HMRC investigations.

So what should you do if you receive a letter from HMRC announcing an inquiry into your tax affairs?

1 Respond in detail

First and foremost, the response to the initial letter will be crucial as it can have the effect of either killing off the inquiry before it becomes serious, or allowing it to develop into a full blown investigation.

The reply should be as comprehensive as possible and fully address all the questions raised by HMRC, remembering that honesty is always the best policy.

Where HMRC uncovers evidence of wilful evasion, penalties can now be as high as 200 per cent of unpaid tax where undeclared offshore bank accounts are concerned, and anyone in that position would be well-advised to make a prompt, full and complete disclosure.

Of course, not everyone who is subject to an inquiry or investigation has necessarily done anything wrong. But bearing in mind that you have to prove yourself to be innocent rather than HMRC having to prove that you are guilty, then it is always wise to be prepared to defend yourself if an initial inquiry is launched.

2 Keep Good Records

These are a great help during tax investigations. You need to ensure, especially if yours is a cash business, that your books are carefully and fully maintained, with all transactions properly logged and recorded so that should you or your business ever be subject to a tax investigation, then you will be able to respond quickly to all queries and provide the information requested.

By law, self-employed individuals are required to keep all accounting records pertaining to their tax return for five years from the filing date, and those whose tax is deducted through PAYE should keep records for a minimum of 12 months from that date.

3 Co-operate

HMRC has the legal right to demand information from you or third parties connected to you – such as your bank manager, solicitor and accountant. Even your customers could be questioned, and all parties are obliged to co-operate.

However, co-operation is not just a matter of legal necessity – it can also significantly help your case. Timely responses to HMRC letters, including all the information requested, can help resolve an inquiry before it turns into a full-scale investigation.

Co-operation can also help in monetary terms as, if any additional tax is found to be due, the penalties imposed can vary significantly depending on the extent to which you demonstrated a willingness to come forward with information and to respond within an agreed timescale.

4 Seek Professional Advice

Having a good professional adviser will, in many cases, help prevent you from becoming the target of an inquiry in the first place. If you are facing a tax investigation, then the help of an experienced professional will be invaluable in dealing with any inquiries and the negotiations which will stem from them.

• Ronnie Ludwig is a partner in Saffery Champness Chartered Accountants and is head of the firm’s Private Wealth Group.