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Being
singled out for an Inland Revenue investigation can be a traumatic experience,
even when you have nothing to hide. Howard Williams heads the team which
helps to decide who will be investigated next
When the
ancient Chinese wanted to curse someone, they would say: 'May you live
in interesting times.' For small business owners there is a modern equivalent
and it goes like this: 'May you be subject to a tax investigation.'
Even the Inland Revenue admits that investigations - or as it now prefers
to call them, inquiries - are not particularly pleasant. The reality is
that most people find them intrusive and stressful. They can also be extremely
unfair. Even if all your business dealings are found to be in order, you
can still suffer considerable loss of time and money.
Of course, if the Revenue finds that a person's tax affairs are not in
good shape, either because of negligence or dishonesty, then the consequences
are even more dire. The taxpayer will be required to pay the sum owed
in full, together with a penalty which could range from 10 to 40 per cent
of the unpaid tax, depending on the amounts involved and the degree of
co-operation given to the tax inspector. In serious cases - nearly always
of outright fraud - this could rise to 50 per cent or higher, and there
is even the prospect of imprisonment.
Every year roughly 2 per cent of the self-employed - up to 50,000 people
- are investigated. If you remain in self-employment long enough, the
chances are you could eventually receive the dreaded brown envelope. Of
those investigated about one-third are found to be negligent - or in a
few cases dishonest - and are required to pay a penalty. At the other
end of the scale about 10 to 20 per cent are given a clean bill of health.
The remainder will have made relatively minor mistakes in their tax affairs.
So how does the Revenue choose its victims? What is expected of you if
you are selected for investigation? And what can you do to minimise the
grief? If anyone can throw light on these issues, it has to be Howard
Williams. He is the Inland Revenue's Assistant Director responsible for
tax compliance and leads a small team of people which advises Ministers
on investigation policy.
So let's start at the beginning. How do you get selected for investigation?
'We have a risk assessment system,' says Williams, 'where we try to gather
all the data we have and compare similar businesses. This picks up the
cases that show bad results for no good reason. For example, if a pub
is showing a rate of gross profit to sales that is 25 per cent less than
other pubs in the area, we want to know why.'
But
other factors also influence the selection. If you are a director of your
own company, if you run more than one business or if your activities involve
a lot of cash trades, you have an increased chance of being picked.
| 'If
a pub is showing a rate of gross profit to sales that is 25 per cent
less than other pubs in the area, we want to know why' |
But Williams
admits the system is less than perfect.
Since self-assessment was introduced a further element has been added
to the selection process, with a small proportion of cases now being chosen
at random.
Once chosen for investigation you will be asked to supply information
and records about your business relating to a particular tax year. This
should be provided within a minimum of 28 days and can include invoices,
receipts, business and private bank statements, cheque book stubs, credit
card statements, building society pass books and business diaries for
the year in question. If there are practical reasons why you cannot meet
that deadline, you can request additional time to assemble the material.
August
| September 2000
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| Could
he be thinking about you? Howard Williams ponders his next investigation. |
For many
people, the thought of handing over so much personal information to a
complete stranger is unsettling. Williams stresses, however, that the
Inland Revenue operate strict rules of confidentiality which are designed
to protect the taxpayer.
Details of how long the investigation process should take and your other
rights as a taxpayer are set out in the booklet Inland Revenue Code of
Practice 2 obtainable from your local tax office. Of course, how inspectors
perform their duties can have a big impact on the person under investigation.
But what can taxpayers do to make life easier for themselves? Williams
believes there are several things which can help. 'Take a bit of care
over record keeping,' he says. 'If you keep decent records, it's much
easier and therefore cheaper for your accountant to draw your accounts
up. It will also prevent things like estimates, which always attract the
inspector's attention, creeping into the accounts. Try to make the distinction
between business expenses and private expenses. If you do that it will
probably go some distance to clearing up a lot of muddle and confusion.'
Williams also believes that providing information when it is requested
can be helpful. In addition, if the investigating officer asks for a meeting,
even though it is not mandatory for the taxpayer to attend, it is sensible
for them to do so.
'Somebody with nothing to hide should be very happy to come in and talk,'
he says. 'It will make things a lot quicker. Another thing to remember
is that the impression you leave with an inspector is very important.
If the inspector finds you completely open and frank, that does register.'
Whether you heed that advice or not, it is certainly wise to stay calm
at all times when dealing with tax inspectors. No matter how irritating
the questioning is, do not become abusive. If you are starting to feel
enraged, you may have a legitimate cause for complaint. Instead of venting
your anger on the inspector, take the matter to the appropriate person
(see panel).
Another source
of help for the self- employed can be the Revenue's Business Support Teams.
They are currently prepared to visit small employers who want help in
running PAYE systems to iron out difficulties. And there are plans afoot
to extend this service to tackle a wider range of tax problems.
Despite the many failings of the system, the Inland Revenue is trying
to update the way it handles tax investigations for the self-employed.
Last December it announced plans to review procedures and look at the
impact of these on taxpayers, with the intention of making improvements.
| 'The
fact that we do give compensation is another reason why inspectors
are careful how they conduct themselves' |
For the
full article, see pages 12, 13 and 34 of the August/September 2000 issue
of First Voice
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