Over the last few months I’ve come across a few examples of what seems to be a change in the way HMRC deal with unrepresented taxpayers in enquiry cases. For the purpose of this blog I’ll concentrate on two cases that have just settled.
STAMP DUTY ERROR
The taxpayer, who we’ll call Mr P, bought a residential property to add to his property portfolio. Stamp Duty was payable on the acquisition as he already owned a number of properties. Mr P approached his local solicitor to deal with the legal aspect of the acquisition and to calculate the stamp duty that was payable. The property was acquired without any problem and all proper fees, taxes and disbursements were paid on the instruction of the solicitor. Just under a year later Mr P received a letter from HMRC challenging the basis of the stamp duty return. Mr P spoke to the solicitor and after a meeting with the partner it was established that there was a shortfall in the amount of stamp duty payable. The solicitor wrote to Mr P to explain how the error arose and apologised for their mistake. The solicitor advised Mr P to pay the shortfall in tax which he did and he then wrote to HMRC to explain what had happened and duly provided a copy of the solicitors letter.
You would think that this would be an end to the matter but that wasn’t to be. Several months after sending the letter Mr P received a penalty assessment based on 15% of the underpaid stamp duty. The letter explained that HMRC viewed Mr P’s actions to be careless and as such a penalty was chargeable. The letter also explained that it was not possible to suspend the penalty. At this point Mr P came to see me.
PAYE COMPLIANCE REVIEW
The company is a long-established business in the construction industry. The accountant is more than capable of dealing with the accounting and normal tax issues but was not asked to be involved with what was expected to be a very routine PAYE compliance visit. During the visit it was established that there were many occasions when employees were taken to the pub for drinks and lunch by the directors. The costs were all recorded as staff entertainment and claimed in the company’s accounts and PAYE had not been operated. The directors had genuinely not appreciated that regular trips to the pub with their staff would not be treated as tax free, and it must be said that the trips were frequent, costly, and involved anywhere up to 30 employees at a time. The Inspector decided that all costs classified as staff entertaining would be assessed to PAYE and NIC in the last 10 years resulting in a potential settlement approaching six figures. The directors spoke to their regular accountant but he didn’t feel confident enough to negotiate with HMRC so he suggested they contact Raffingers.
The rules and laws on HMRC investigations can be quite complex but I’ll attempt to explain them in simple terms. HMRC can enquire into a return if they believe it is wrong. There are certain time limits that need to be adhered to and the Inspector is entitled to ask for information and records that are reasonably required for the purpose of determining the tax position. If something is found to be incorrect then HMRC can raise assessments up to 4 years without question. To assess more than 4 years the Inspector needs to establish that the taxpayer was careless. To assess over 6 years there needs to be a deliberate behaviour. Penalties can also be charged based on a percentage of the tax lost. The worse the behaviour, the higher the penalty, however the taxpayer can mitigate the penalty by cooperating with HMRC. If a taxpayer has taken reasonable care, i.e. not guilty of careless or deliberate behaviour, then no penalty is chargeable. The rules for VAT assessments are slightly different as are the rules for penalties in failure to notify cases.
If we return to the first example with the stamp duty error, HMRC had concluded that Mr P was guilty of careless behaviour. This carries a minimum penalty of 15% if full abatements are allowed. HMRC have the power to suspend a careless penalty providing it’s possible to set appropriate suspension conditions. The penalty in question was a few thousand pounds so my assumption is that they thought Mr P would simply pay up without taking the matter further. The first thing that struck me was that Mr P had not been careless at all. He had appointed a solicitor to deal with the property purchase and the stamp duty calculation. He trusted the solicitor’s calculations and paid the tax without question. When the error was identified by HMRC he paid the additional tax straight away. I spoke to the officer dealing with the enquiry and asked how he had concluded that Mr P was careless. Surely he had taken all reasonable care in appointing a professional person to deal with this matter and it was the solicitor that was at fault. I followed up the call with a letter to HMRC appealing against the penalty and within a few weeks the Inspector changed his mind and vacated the penalty charge.
The second case is slightly different in that there clearly are tax implications to the practice of taking large numbers of your staff down the pub on a regular basis, however the approach to tax all the staff costs without exception over a 10 year period was a bit heavy handed to say the least. I spoke with the finance director and went through all of the schedules in detail. On review we established there were allowable staff entertainment costs that shouldn’t be taxed. There were also expenses that had been incorrectly classified as staff entertainment which were mainly promotional events for existing and potential customers. There were also occasions when clients were being entertained and the correct tax treatment would be to disallow the costs for corporation tax purposes. We also considered the directors behaviour and agreed this could be viewed as careless but certainly not deliberate. As explained earlier, the difference is very important in a case like this as HMRC can only assess 6 years for careless behaviour, whereas deliberate behaviour can open the door to 20 years assessments. The potential penalties can be 15% of the tax lost for careless behaviour but 35% for deliberate behaviour, assuming full mitigation is given. It is also possible to suspend a careless penalty.
I had a long discussion with HMRC who accepted the original proposal to assess 10 years was, in the officer’s words, “A bit cheeky”. We were still in the process of negotiating the adjustments and the number of years involved so I didn’t make a big deal of this comment. I did suggest that if a recognised firm of tax specialist accountants had been involved from the start then his settlement proposals wouldn’t have been anywhere near as high and he agreed. We finally agreed to two years assessments with a suspended penalty and the staff entertainment restricted for all non-taxable expenses. The original settlement of around £100,000 was now at a more manageable £20,000.
For those of you who read my blogs you will know that I have a lot of respect for HMRC and the work it does. I am an ex-Inspector myself and I have always found that the majority of HMRC officers are well trained and very good at their job. I do object though, to some HMRC staff looking at unrepresented taxpayers as an easy target for excessive assessments and penalties. These are two of the cases I have been involved with over the last few months but there are at least half a dozen others with similar circumstances.
My advice to anyone who is dealing with HMRC without some form of professional representation is don’t always assume that the Tax Inspector is correct simply because he is an officer of HMRC. Tax Inspectors have targets to reach and may be tempted to claw back more tax than is correctly due from taxpayers without an agent. Trying to save money on accountant’s fees in an enquiry is a false economy and an experienced tax professional will save you more in tax and penalties than they charge in fees. My final advice is to speak to a tax professional before agreeing anything with HMRC.
By Neill Staff
Tax Partner and Tax Investigation Specialist
If you need advice regarding responding to a HMRC enquiry, contact our Tax Partner at email@example.com or call him on 020 3146 1605.
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