After four years of dealing with HMRC in a Self-Assessment enquiry case, we finally had our day at the First Tier Tax Tribunal. We then had another two months wait for the Judge’s decision which arrived last week. Despite the fact that the Judge had agreed with the majority of our arguments and was openly critical of HMRC procedures, he felt that HMRC had just about proved their case on the civil basis of the balance of probability. To say we were disappointed is an understatement.
It was a case that I had desperately hoped we would win although I was aware there were weaknesses. The case revolved around two bank deposits in the client’s personal bank account dating back to 2011 where evidence could not be provided that the deposits were not taxable in nature. HMRC had raised an assessment and we had appealed. There had been meetings and correspondence, but we could not sway HMRC’s opinion. It took slightly under a year to get through the independent review process and get to the hearing day at the Tribunal. Many hours had been spent preparing our legal arguments and witness statements. HMRC had been just as busy in preparing their case and in the end it all came down to the Judge’s view, and he felt that HMRC had edged it.
I would understand if you’re thinking why I would use losing at the Tribunal as the subject of a tax blog, but I’m doing so because there are key fundamental lessons to be learned. They are lessons that I advise on regularly and what I’m about to say should be known by all professional advisors.
Always check the legality of any information notices or enquiry letters issued by HMRC. Do not assume that because the notice has come from HMRC that it must be right. Tax Inspectors are human and they can make mistakes. Some Tax Inspectors don’t understand the tax laws and occasionally some tax Inspectors simply choose to ignore them. In my former life as a tax inspector there were a few occasions when I asked for information and documents that I wasn’t convinced I was entitled to. If the taxpayer and their agent complied then that was their decision and more fool them. The better more experienced accountants would point out my “mistake” and I would withdraw my request, and I had more respect in them for doing so.
Don’t assume that the Inspector is going to be your friend. I continue to be amazed by stories from taxpayers who tell me that they rang the Inspector after receiving an enquiry letter and how friendly the Inspector was. They chatted on the phone for ages and then they agreed to provide all their personal bank statements and goodness knows what else because the Inspector had been so nice. I am not advocating being anything other than courteous and polite with HMRC and building a degree of rapport with HMRC is not a bad thing, but never lose sight of the fact the Inspector’s job is to test the accuracy of your tax affairs and collect any backdated tax, interest and penalties if anything is wrong.
A tax enquiry is not a cosmetic exercise. HMRC will have done their homework and collated all manner of information about you. The Inspector has no desire to be your friend, they are there to do a job.
Don’t be afraid to say no. The tax laws as they currently stand are very heavily weighted in HMRC’s favour and the fail-safe laws on the side of the taxpayer generally consist of HMRC having to act in a reasonable and proportionate manner and within specified time frames.
If HMRC ask for information or a document that is out of time or not covered within specific legislation then consideration must be given to saying no to the request.
Which leads us very nicely on to what happened in our tribunal case. The client received a very strong letter from HMRC back in 2015 alleging serious tax irregularities. It wasn’t a standard letter and made no reference to which section of the taxes acts under which the enquiry was being made. Nor was it a Code of Practice 9 letter which deals with potential fraud and provides the taxpayer with the opportunity of making a disclosure. The letter was like nothing I had seen before and all manner of HMRC factsheets normally reserved for taxpayers being investigated for fraud were enclosed with the letter. The client approached his accountant at the time who should have immediately challenged the basis of such a letter, but who instead didn’t want to rock the boat and arranged a meeting with HMRC instead.
The meeting was with two officers from HMRC who spent best part of four hours going through each and every part of the client’s life and business dealings. Towards the end of the meeting the lead inspector said that he wanted to see bank statements and credit cards for 10 consecutive years so that he could review the tax position in more detail. Unfortunately, the accountant did not challenge the legality of the request and instead suggested that his client provide two years bank statements which HMRC agreed to. I have no doubt that the accountant left the meeting thinking he had won a minor victory and acted in his client’s best interests, but nothing could be further from the truth. When we began acting a year or so later, we realised that the whole enquiry process was flawed and the Inspector’s “request” was invalid and should have been resisted.
If the “request” had been refused HMRC would have needed to issue a formal information notice and, as we proved at tribunal, such a notice would have been invalid and quashed on appeal. However, by providing the bank statements, the Inspector was able to ask questions about some 20 or so bank deposits dating back several years, and then claim they had discovered a tax failure when full information could not be provided about the source of those deposits. When we pointed out the procedural flaws in the method of obtaining the bank statements the Inspector said that the statements had been provided to HMRC voluntarily.
As a result of not challenging HMRC’s “request” and providing information that should have been refused, the client now has to pay a tax bill that is patently unfair. Thankfully Raffingers were able to mitigate HMRC’s approach when we were appointed, and we managed to get the older of the two assessments – which was over six years old - vacated by making the case that not keeping records of non-taxable receipts does not constitute a deliberate behaviour for tax assessment purposes. We also persuaded HMRC not to raise assessments in later years on the “presumption of continuity” and we managed to persuade HMRC to suspend any penalty. But these were all minor victories in a long running war that was effectively lost at the first meeting.
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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