What you need to know
What happens when you send in your tax return?
When you submit your tax return, HMRC will process it. This means that the figures on your tax return will be inputted into the Self Assessment computer system.
At this stage, there will be checks made for obvious errors, such as the figures not adding up, but the return will not be looked at closely. If you have submitted the return before 30 September you will be sent a calculation of the tax due.
If you have calculated the tax due yourself you will either receive confirmation that the return has been ‘processed without need for correction’ or you will be sent a calculation indicating where the figures differ from yours.
Enquiries into your tax return
HMRC usually has 12 months from the submission of the form to open a formal enquiry into your tax return. This is sometimes referred to as a Section 9A enquiry. The time limit can be longer than 12 months if the return is submitted late.
Most enquiries are opened because the Inspector knows or suspects something is wrong with the return. There are also a number of purely random enquiries each year. The Inspector will never disclose whether the enquiry is random or if he/ she knows or suspects something.
If an Inspector of Taxes opens a Section 9A enquiry he will usually write to you and your accountant, if you have one, setting out his concerns and asking a series of questions or requesting documentary evidence of entries on your return. Once the enquiry is complete, the Inspector will tell you that he or she wants more tax, that nothing needs changing or, occasionally, that you have paid too much tax.
If more tax is due, interest will be charged and the Inspector may also impose penalties, which can amount to 100% of the extra tax or more if there is an international element. If, when looking at your return for a particular year, the Inspector of Taxes finds a serious error in your figures and feels that this may have occurred in previous years, he is able to issue a ‘discovery assessment’ for earlier years, even if the normal ‘enquiry time limit has passed’.
If HMRC finds your returns are wrong, it will seek to recover any additional tax that may be due, possibly also with interest and a penalty.
If you receive notice of a Section 9A enquiry and you do not have an accountant, you should seriously consider appointing one who is experienced in this area. The professional costs in dealing with an enquiry from HMRC can quickly mount up. Many accountants can arrange insurance to cover such costs.
MU Professional Expenses Insurance
MU members have access to a tax investigation insurance benefit, for which no registration is required, that covers a number of types of HMRC enquiries.
Dealing with an enquiry
A few ideas that may help you survive an enquiry relatively unscathed:
— Take your accountant with you or, better still, let him or her handle it alone.
— Effective handling of an investigation can make an enormous difference in the time taken and the amount of tax or penalties you have to pay.
— Do not be obstructive. You will only make things worse for yourself. Try to find out what the Inspector’s concerns are and alleviate them so as to head off the enquiry.
— Do not try to fob the Inspector off. It is essential that you take him or her seriously and provide all of the relevant facts and details.
— If you are being investigated, you had better get used to the idea that this may well also include an investigation of your spouse, family and personal affairs.
— If you are asked for your personal bank statements, review them and analyse them before submitting them to the Inspector so that you can provide analysis with the statements. Do not simply hand over any records that are requested, provide summaries and references to help the Inspector understand.
— It is usual for the Inspector to ask for a meeting with you.
— Before the meeting, talk with your accountant and get him or her to scrutinise your information and question you on the pointers the Inspector is likely to raise.
— Make sure that you are familiar with your own documentation.
— The Inspector will usually require capital statements. These should show your assets and liabilities from a few years ago to the present. The aim is to show the Inspector there are no undisclosed sources of income or assets. Do not wait for the Inspector to request them and make sure to include any cash balances.
— HMRC will treat any unexplained receipts, deficits on cash accounts or unsubstantiated receipts as additional income, so make sure all items are properly explained.
— Go through your living expenses for the current year and compare them with expenses in previous years, making allowances for any special factors, such as holidays, new kitchen units etc. Any major differences need to be explained.
— If HMRC start an interview with the words ‘you are not obliged to say anything but..’ terminate it immediately and call a solicitor straight away!
HMRC prepares notes of meetings and you should be entitled to a copy.
— If you do strike a compromise with the Inspector, then do consider the effects of interest and penalties on the total payable.
— As a general rule, it is rarely, if ever, advisable to formally agree a settlement at interview.
— Always give yourself time to go away and think about the Inspector’s proposals. You may perhaps have forgotten that you received a loan from a relative during the period under investigation or you were sick and received state benefits.
— Always agree a settlement in writing, either via your accountant or yourself.
— The maximum penalty is 100% of the tax lost. This can be reduced, depending on the circumstances leading to the error.
— You do not have to accept what you are told by the Inspector, but you must try to discuss how the penalty level is arrived at. You may be able to persuade the Inspector to add more weight to some of the points that are in your favour.
— If you are worried about incurring additional accountancy fees, remember that any tax and penalty could far exceed them.
If you prepare your case well, you could minimise accountancy fees as well as tax and penalties.
Please note, it is always possible that the Inspector may return your books with a letter saying that he is entirely satisfied with your records and no amendment is necessary — it really does happen!