Towards the end of last year we managed to settle a very long running status enquiry with HMRC. The client had a work force of several hundred operatives, most of which were either self-employed or provided their services through a service company. HMRC believed that the operatives were employees and that their income should be subject to PAYE. The case lasted several years, meetings were held and PAYE assessments raised, but in the end, we brokered a deal that everyone seemed happy with. However, as part of the enquiry process, the Inspector began enquiries into a small number of the operative’s tax affairs, including their Self Assessment returns, and in some cases the accounts and tax returns of their service companies. The point of the enquiries had been to obtain information about working patterns and potential status, although the Inspector also questioned certain deductions that had been claimed. Responding to a HMRC enquiry in the right way sets the course for the whole investigation – through this enquiry you’ll see why…
Move forward to today and we are now left with a small number of enquiries that need to be resolved with HMRC. The status issues are resolved; however, the accounts do contain some deductions that are potentially excessive. Unfortunately the operatives had all used the same accountant to prepare their accounts and tax returns, mainly because he was cheap and didn’t seem too interested in spending much time on getting things right. Most of the expenses in their company and self-employed accounts were estimated. Some of the costs (such as travel, clothing and rent) would not be fully allowable.
I started picking up on these smaller enquiries with HMRC towards the end of last year. To my mind it was going to be a fairly simple job of discussing the expenses and agreeing a one year adjustment. How wrong could I be!
I have titled this article Bad Behaviour in a semi-clever attempt to link into the behaviours HMRC need to establish to raise assessments. By way of background, HMRC can raise assessments for 4 years without needing to establish if a taxpayer has been careless or guilty of a deliberate behaviour. To assess more than 4 years, but no more than 6 years, HMRC must establish that the taxpayer has been careless in his actions. To assess more than 6 years the taxpayer must have been deliberate in his actions. There is also a behaviour described as deliberate and concealed, which is when the taxpayer deliberately did something to avoid or evade paying tax and then tried to cover his tracks. HMRC don’t get any extra years for this as a deliberate behaviour gets them over 6 years and allows HMRC to assess up to 20 years. The concealed behaviour does, however, result in extremely high penalties. An alternative word for this type of behaviour is Fraud.
My argument in these cases was quite straightforward. The operatives in question are all lovely guys but they have no knowledge of tax or accounts. They provide manual labour services to our client company and they were fully reliant on their accountant to prepare accurate accounts and returns and simply signed what was sent to them in the post. My argument to HMRC was that the operatives had taken reasonable care in their tax affairs by appointing a tax professional, and that any errors in the accounts were not necessarily their fault. I didn’t expect HMRC to accept this suggestion readily, but it is a reasonable starting point for negotiations and, after all, the enquiries had only been started for the purpose of getting status information. Who would really be bothered about a few old enquiries and some unanswered questions about a few expenses?
You can imagine my surprise when the Inspector told me that HMRC’s view was that the errors and overstated expenses in the accounts were as a result of deliberate and concealed behaviour. The Inspector went on to list out the various discovery assessments she intended raising, in some cases going back to 2008. I hadn’t dealt with the early stages of these smaller enquiries but I hadn’t heard or seen anything to suggest there was anything out of the ordinary. I spoke to the Inspector who explained that they had received a letter in each case explaining the nature of the expenses claimed and why these should be allowable for tax purposes. None of the guys had mentioned anything about this to me so I asked the Inspector to send copies of the letters to be sent to me. I was, quite frankly, intrigued to see these mysterious letters as none of the guys I am looking after seem the type to be writing letters to the tax office, or anyone else for that matter.
I received the letters last week and everything started to make sense. When I spoke to the clients they confirmed what had happened. When they received their original enquiry letters some 4 years ago, each and every one of the guys tried speaking to their accountant who promptly dug himself deep into a bunker and refused to help. Not knowing what to do next, they went to see one of the directors of the main company who we’ll call Mr Idiot. Mr Idiot left the company a year ago for a number of reasons (which include him being an idiot), and unfortunately for everyone, he had a massively inflated ego and a belief that he could deal with anything, including tax enquiries. He was a popular person with the workforce at the time and he clearly felt that he could help. At the time I was acting for the company in the early stages of the PAYE status enquiry so it is a shame he didn’t speak to me or someone at my firm as we could have dealt with the Inspector’s questions in a far more efficient manner. Instead he set about responding to a HMRC enquiry by drafting a series of eloquently written letters which contained wild and fanciful explanations about the expenses that had been claimed, none of which looked remotely believable. The guys told me that they hadn’t got a clue what had been said in the letters, but they’d been told it was ok and all they had to do was sign and send the letters. They had faith in Mr Idiot and so they did what they were told.
So where are we now? To say that the letters have bitten the clients on the bum is a proverbial understatement. HMRC are pointing to the signed letters as evidence that the clients deliberately claimed expenses that they should have known were not allowable, and then lied to conceal the truth. Mr Idiot is nowhere to be found, and we are left with the devil’s own job of convincing the Inspector of what actually happened in this case. In fairness to HMRC, the Inspector is listening and has agreed to a series of meetings with the clients so we can demonstrate that they didn’t have the ability or capacity to send the letters. In one case we have even recovered an email from Mr Idiot in which he sent the letter with an instruction saying it needs to be printed and sent to HMRC. This will help our case.
The point to this story is that no one should deal with HMRC on an enquiry case unless they have sufficient knowledge and ability to do so. Help from well intentioned friends is not always a good thing, and a letter full of fanciful explanations bearing no resemblance to the truth is most definitely a bad thing. When in doubt, see a tax professional before responding to a HMRC enquiry.
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.