If you have received a letter from HMRC or are undergoing a tax enquiry, Neill’s latest blog explains why you need tax enquiry support…
I returned to work at the start of December after spending a week in Vegas. It was a fantastic week that I spent with my grown up boys and was everything I had hoped it would be. We drank too much without getting overly drunk and we gambled a lot without losing too much money. But all good things come to an end and I trudged into work on a cold Tuesday morning not looking forward to the mountain of emails and post that was undoubtedly waiting for me.
In truth, it wasn’t as bad as I had expected. My team, and the other partners at Raffingers, had tried manfully to fend off most of my post and I was left with a core of about 20 letters and 500 emails which isn’t as bad as it sounds. As I quickly scanned through everything for urgent and time critical letters, I came across an email from a senior manager in HMRC who I had asked to look at an enquiry case where the Inspector was being unnecessarily pedantic. His email was short and to the point, it said “I think you might have a point” and then went on to ask me to ring him when I was back at work.
This leads into the thread of this month’s blog, and the moral of the story which is to be very careful dealing with HMRC unless you have an accountant. Our client, who we’ll call Simon, did his own tax returns for a number of years. He had a PAYE day job and rental income from two residential properties. He then received a letter from HMRC enquiring into his most recent return, and asking him to confirm the properties he owned, when he bought them, how much they cost, and to provide details of the rental income and expenses. The enquiry letter was issued correctly and a lot of what HMRC was asking for was ok, but the questions about how the property purchases were funded in the earlier years shouldn’t have been asked. A decent accountant would have known that and this is why we advise those under investigation to get tax enquiry support. The client, firmly believing he hadn’t done anything wrong, rang HMRC as soon as he received the letter and had a series of lengthy conversations with the Inspector – who Simon described to me as being very chatty and friendly. After three or four calls with HMRC, and after the Inspector had obtained the client’s life story, Simon received an information notice for all sorts of information based on his conversations with HMRC, not all of which related to the tax return under enquiry.
Simon initially admitted to me that he felt a little betrayed by the Inspector. He thought they had developed a good understanding, bordering on a friendship, and the notice made him realise that the Inspector had simply been out to obtain as much information as possible. I must admit that I struggled not to laugh or roll my eyes when he said this. Tax Inspectors are paid to challenge the basis of tax returns and they are never going to be your friend no matter how nice or helpful you might be. The trouble is that Simon ignored the information notice, and the initial penalty for failing to comply. He ignored the daily penalties that followed and only took notice at the assessments and closure notice that had recently been issued. The Inspector had concluded that none of Simon’s rental expenses were allowable and that he would be raising assessments for the last six years on the same basis. In total, HMRC were looking to assess around £25,000 in tax together with a penalty of around £6,000.
I agreed to provide tax enquiry support for Simon several months before and I spoke to the Inspector dealing with the enquiry. He wasn’t a bad chap by any means, but he had clearly assumed that the £31K settlement was done and dusted, and I assume he had already reported the yield on his figures for the year. There was no question of him agreeing any sort of expenses he told me. The client had the opportunity to respond to the information notice and chose not to do so. It was too late now and his decision stood. We could appeal and ask for an independent review, but he could guarantee his decision would be upheld and our only alternative would be to go to tribunal!
I am possibly making this sound a little harsher than it was explained to me, and this is not going to turn into a HMRC bashing blog. Inspectors will always much prefer to deal with an accountant rather than an unrepresented taxpayer, mainly for this sort of reason. Inspectors don’t want to be ignored and ultimately they will take a decision to close a case by disallowing expenses or taxing income simply because they have no alternative to move forwards. The issue I had with this case was that the information notice issued to Simon was overly cumbersome (57 questions) and most of the details were not even connected to the tax return under enquiry. There were also some procedural and technical problems that rendered the notice invalid. The more I spoke with the Inspector, the more entrenched he became in his position. Eventually I asked for a senior officer to review the case to see if we could move forward without the need for complaints and independent reviews.
The strange thing about Simon’s case is that his tax returns were not particularly wrong. He had claimed a few costs that he shouldn’t have because he didn’t know they were allowable for tax. Conversely, we found some additional costs to claim which Simon didn’t realise he could claim for. The net result was a shortfall of about £1,000 in profits for the tax return under enquiry and a tax bill of around £200. His mistake was to contact HMRC without knowing what was going to happen and failing to prepare for the calls. It always strikes me as strange that if your car goes wrong you take it to a mechanic, or if your electric goes wrong you ring an electrician. But as soon as someone gets a letter from HMRC suddenly people want to save money by doing a bit of tax DIY. By seeking tax enquiry support, you get an expert that would have responded to HMRC on Simon’s behalf, provided the relevant information, agreed to some nominal adjustments, and avoided the whole episode of information notices, assessments and penalties.
I rang the senior officer later that morning. He was a nice guy, very much old school, and who immediately accepted that the case had ended up somewhere that just didn’t feel quite right. He accepted that the information notice was incorrect and is now arranging to vacate the penalties. We are in the process of providing some supporting documents to the Inspector with the manager’s verbal agreement that the assessments will be vacated when the information is received. All of this could have been avoided, if Simon had received specialist tax enquiry support when he received his letter.
By Neill Staff
Tax Partner and Let Property Campaign Specialist
If you need tax enquiry support, contact our specialist tax partner at email@example.com or call him on 020 3146 1605.