December was quite a month, not only for the mad rush of work that the tax return season brings, but also a couple of HMRC letters that landed on my desk. They were both in connection with long running tax enquiry cases and as I proceeded to deal with the letters during the course of the month, I was struck by the difference in how different HMRC Inspectors work their cases. This blog follows the most recent events on both cases and show how good, and dare I say how bad, HMRC can be.
CASE 1 (Bad Inspector)
This is an ongoing tax enquiry case that I inherited about 2 years ago. The client had initially been persuaded to provide HMRC with several years' worth of bank statements at an early stage in the enquiry (before we started acting). The case was being worked by one of HMRC’s specialist offices and the Inspector had sailed into the opening meeting, guns blazing, talking in sinister tones about information that he apparently had in his possession. It had been suggested that it was in the client’s best interest to comply with the Inspector's request to try and resolve matters as amicably as possible. It has to be said that the agents at the time didn’t just roll over and play dead. They questioned whether formal enquiries should be in place and then agreed to provide a sample period of two year's worth of statements, rather than the six years' that were being requested. These were then provided to HMRC and, several months later, the Inspector produced a list of deposits where he wanted to know the source of the money.
Skip forward a couple of years and several emails, letters and meetings down the line, we are left with a handful of deposits dating back some six years that the client simply can’t find any evidence for. The Inspector has raised an assessment for one of the years he was looking at (2011/12 – under 6 years old when the assessment was raised) and has accepted that the other year he was looking at (2008/09 – now over 6 years old) cannot be assessed because HMRC cannot establish a deliberate behaviour. I’ll talk more about this later.
Before we get to the crunch of the blog, let me say that there are several lessons to be learned from this case and some interesting legal points. The first is the basic rule, in that you should only ever provide HMRC with what they are legally entitled to have. I have seen so many cases where the taxpayer and their agent have provided bank statements to the Inspector when they were not required to do so. A regular explanation is that the taxpayer felt he had nothing to hide and just wanted to speed up the tax enquiry process. The trouble with this is that the Inspector will check the statements with a fine toothcomb, and if there are deposits for even the most trivial amounts, then HMRC will want to know where they have come from. If no explanation can be provided, The Inspector may well seek to treat the deposits as un-taxed income and it is the devil of a job to convince them otherwise. Then of course you have the question of additional assessments for earlier years.
In fairness to HMRC, they do catch a number of dishonest taxpayers this way, and it is a little unfair for taxpayers and their agents to be shocked at this approach when, to my mind anyway, it’s obvious what’s going to happen. It really is like giving Billy Bunter, the keys to the tuck-shop and then being surprised that all the chocolate has been eaten. The legal position on bank statements is that HMRC are always entitled to look at business accounts for returns that are subject to enquiry. Business accounts can include personal accounts that are used for business purposes. A private account that is used to deposit rent receipts and pay rental expenses becomes a business account for HMRC’s purposes. But purely private bank statements are beyond the automatic remit of HMRC’s requests, unless omissions have been established.
Did I say legal points as well? Without being too boring, hopefully, let me explain about HMRC’s right to raise assessments, what they need to prove, and what the time limits are. HMRC have a 4 year period in which they can assess tax and they don’t need to establish if a taxpayer has been careless. To assess tax over 4 years' old and up to 6 years', HMRC needs to establish that the taxpayer was careless. To assess over 6 years' and up to 20 years', HMRC needs to establish that the taxpayer was guilty of a deliberate behaviour (ie he meant to do it). In this case, the Inspector is contending that my client was careless in not keeping records of his bank deposits going back many years. Now I accept that this could be the case if the taxpayer had deposited taxable receipts into his bank account, and there was an issue in quantifying the taxable amount. They would also have a case if any errors or omissions had been established during the course of the tax enquiry, but nothing has. With this in mind I would seriously question whether a taxpayer is careless in a case where the Inspector simply looks through bank statements and pulls together a list of deposits and asks where they came from – without any other evidence of wrong-doing. I should also explain that the information supposedly in the Inspector’s possession has never materialised, nor will he admit to what information he purportedly had. He simply blagged his way into looking at my client’s bank statements and now assumes careless behaviour because my client didn’t keep a record of the various gifts and loans he received in the form of 2 unidentified deposits.
We asked for the assessment to be independently reviewed and clearly set out our views on the legal position. We received an eleven page response supporting the Inspector’s view, which consisted mainly of extracts from the case correspondence that had been cut and pasted into the reply. The all-important legal issue of whether you can be careless of not keeping records of non-taxable income was limited to two short paragraphs. Basically the reviewing officer said that in his opinion you can but provided no further reasoning. Thanks a bunch.
On hearing news of the review, and after 2 long years of having the tax enquiry hanging over him like a bad smell, the client asked me to speak to the Inspector to try and settle the case. The assessment is based on two deposits, one of just over £55,000 and one for just over £8,000. The client said he would pay the tax on the £55,000 deposit if HMRC gave up on the £8,000. The settlement would be around £30,000, unless the Inspector refused to give up on the £8,000, in which case the settlement would be more like £33,000. I was confident the Inspector would take the offer and avoid taking the case to the Tax Tribunal. I genuinely thought he would see sense and even accept that HMRC’s workmanship in this case has been flawed at best, and bloody-minded at worst. You can guess the answer of course. The Inspector would have none of it and seems determined to nail the client to the floor. We are currently preparing to take the matter to the Tax Tribunal.
CASE 2 (Good Inspector)
The second letter I received was from an Inspector asking for a meeting with my client. Meetings with HMRC are always to be considered very carefully, mainly because clients can be prone to saying silly things in front of the Inspector and giving the impression something is wrong, even when it isn’t. But in this case the Inspector had the client bang to rights and wanted to discuss how to progress the tax enquiry towards settlement. It was the sort of meeting that no accountant enjoys and every sensible taxpayer would want to avoid at all costs. In truth I didn’t expect that the Inspector would be overly tough or antagonistic. He had held all of the good cards for quite a while, but had been entirely reasonable in our dealings. Suggestions about the number of years to be assessed and representations on penalties had been taken on board and I suspected, rightly as it turned out, that the Inspector was one of the old-school breed.
The client arrived at our offices an hour before the meeting, full of nerves and tearful. She had told me she had been dreading the meeting and hadn’t had a good night's sleep in weeks. I settled her nerves with a cup of tea and told her it wouldn’t be half as bad as she was expecting, hoping of course that the Inspector was going to be as reasonable as he had been on the phone. I went to collect the Inspector from reception and mentioned that the client was not in the best place. He nodded and told me he had no intention of upsetting her further.
The meeting went ahead without a hitch and I have to say that I was thoroughly impressed with the way the Inspector handled the case. Polite and professional, considerate and even compassionate to the client's predicament. When the meeting ended the client shook him warmly by the hand and thanked him for the way he had dealt with everything. The tax enquiry is well on the way to being settled now and I hope I get the chance to deal with the Inspector on another case.
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