Beware of a tax enquiry

 In Practice Management

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Beware of a tax enquiry

Under Self Assessment an individual files their tax return, and H M Revenue & Customs (HMRC) process the information. HMRC then have the right to enquire into that tax return within twelve months from the date it is filed. HMRC do not have to give a reason for the enquiry. Such an enquiry can be both time consuming and expensive, in terms of both professional advice required and additional tax payable. There have been certain recent changes to these procedures.

New Penalty Regime

From 1 April 2009 a new penalty regime applies, which is likely to lead to higher penalties being levied. This is because penalties are no longer based on the additional tax due, but are calculated on the potential lost revenue to the exchequer. This is the amount of tax payable as a result of correcting the assessment, including notional lost revenue. Consider a sole trader who makes a £10,000 trading loss which is not relieved for tax purposes. After an HMRC enquiry the loss is reduced to £5,000. HMRC will seek to apply a penalty on £5,000, even though no tax relief was ever claimed. If several years are involved the penalty can be considerable.

The rate of the penalty will be calculated as a percentage of the potential lost revenue based on what HMRC perceive as “the behaviour of the taxpayer”. This can vary from no penalty if the individual is deemed to have taken reasonable care, to 100% of the tax for deliberate and concealed cases.

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Furthermore HMRC are now going to publish the details of who they class as deliberate tax defaulters, including those who deliberately understate the tax due, or overstate claims, of more than £25,000.

Compliance Checks

HMRC have also introduced a new regime of compliance checks from 1 April 2009. As a consequence HMRC no longer have to wait for the submission of a tax return, but can raise a “real time” compliance check into the individual’s tax position. These normally involve HMRC telephoning the individual and following up with a visit or a request for information.

We will work closely with our clients to minimise the likelihood of an HMRC enquiry or compliance check, and to assist our clients if they are subject to one of these. To further protect yourself you can take out fee insurance to cover the cost of our fees for dealing with an enquiry or compliance check into a self assessment tax return for an individual, trust, company or partnership.

Problem Areas

There are a number of potential problem areas for personal representatives and trustees. For those either running a business, or renting property, it is important to make sure that all business expenses are incurred wholly and exclusively for the purposes of the business, even if there is a net loss, to avoid HMRC charging interest on incorrectly claimed expenses. Where tax depends on the market value of an asset it is recommended that the valuation is provided by a professional with relevant experience, including dealing with enquiries raised by HMRC’s valuation team. Finally, if there are capital disposals the capital gains should be calculated, or checked, by a tax advisor to ensure that they are correct, all relevant claims and elections made and allowable losses claimed.

If you would like further information about your tax returns, please contact Mark Herson on 01865 200500.

If you would like more information about our fee insurance, please contact Jo Grieve on 01635 553261.

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