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Tax Investigation – How Come?

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Tax Investigation – How Come?

Tax Article
We all know the Government is in need of cash, and the Chancellor has already instructed the Local Compliance Investigation Teams of HM Revenue and Customs (HMRC) to take a tough line with some ‘buy-to-let’ property owners. Therefore HMRC will necessarily increase the overall number of tax enquiries made this coming tax year and some have estimated that this could mean as many as one in 50 filing their returns being put through what is termed a ‘full’ HMRC investigation.


The usual cash businesses such as private taxi firms, pubs, corner shops and takeaways are vulnerable but property owners should not be too complacent. However, what investigation work is done by HMRC is usually done for a reason.


It should be remembered that HMRC has the power to enquire into any tax return and to request information for the purpose of establishing whether the return is correct – no reasons need be given and normally will not be forthcoming. However, if the time limit for a ‘usual’ enquiry has passed HMRC may be able to make a ‘discovery’ assessment for which careless or deliberate conduct on behalf of the taxpayer must be present or it can be proved that HMRC could not have been reasonably expected to be aware of the situation giving rise to the discovery from information available during the usual enquiry period.


Getting Your Return Right!


HMRC’s computer programmes determine the level of risk a list of tax returns meeting certain criteria generates, however, tax enquiries usually begin because HMRC has reason to believe that some aspect of the tax return is wrong. The actual reason will always fall into one of the following three categories whether the enquiry is ‘full’ or ‘aspect’ concentrating on areas of tax assessment where there is a high risk of error or evasion:

1. Some figures on the tax return may not match with the other information they have at their disposal,


2. The return may purely have been sent in late bringing the taxpayer to the taxman’s notice (enabling a longer enquiry time), or


3. HMRC received a ‘tip off’.


Property Sale and/or Purchase


Inspectors regularly review information from the Land Registry relating to the purchase and/or sale of property. Not only are they given the names of both vendors and purchasers but also the price paid and names of solicitors.


These lists are then checked against voting and other Local Authority registers obviously identifying not only purchasers of properties but also whether the properties have been let. If the properties have been let but nothing is shown on the return (even if a loss is made the income still needs to be declared) that may result in HMRC sending out an enquiry letter.


If the registers show that a company should have declared living accommodation as an employee benefit on form P11D but has not, this could also result in an overall enquiry letter despite the fact that the non declaration might not have been either the property owners or tenants fault.


Local Authority lists can hide a multitude of sins – even information obtained from the Planning Department will show the purpose of property acquisition and when someone subsequently applies to improve their property this could possibly be seen as renovation for letting. Further, the question may be asked: ’how can they afford to renovate a property whilst drawing so little out of the company?’


Something as straightforward as a mortgage might be the answer but a check will be made against the statutory returns submitted by banks and building societies detailing the names of borrowers, amount borrowed and when. Interest bearing accounts opened to take the income from lettings are a source of information for HMRC, as are details of insurance receipts.


Managing Deliberate Defaulters


An investigation is bad enough for the taxpayer but now there is something else. HMRC have developed a ‘programme’ they have named ‘Managing Deliberate Defaulters’. A ‘Deliberate Defaulter’ is an individual or business which has ‘deliberately’ understated their tax liability.


HMRC will be sending letters to an estimated 900 known tax evaders as part of this new programme informing them that they are now under these increased levels of scrutiny. ‘Deliberate’ does not include those who are ‘careless’ about their records or returns. The distinction might not be clear but the final effect of how individuals are categorised might mean that the investigation lasts for longer than usual.

For example, not keeping proper records of sales and purchases such that the accountant has to reconstruct them from the other business records is ’careless‘.
If a sale is not recorded intentionally (for example, a friend rents your house for Wimbledon Fortnight and pays for it but the letting is not declared) then this is likely to be regarded as having been made by a ‘Deliberate Defaulter’ defined in the HMRC Press Release as ‘businesses and individuals that have been found to have made deliberate errors in the tax affairs resulting in tax losses or more than £5,000’. The move apparently aims to increase tax revenue by £7 billion a year.


Depending on how ‘deliberate’ the actual default made was, ‘Deliberate Defaulters’ will be placed in this new programme for between two and five years.  From the list of what those taxpayers can expect during that time they will not be allowed to ‘pay up and go’. HMRC intend to make:


• Unannounced visits to premises to check the records being kept;


• Demands for additional information to be submitted with their tax returns (full accounts, bank statements, invoices etc);


• Checks on all aspects of their tax compliance - the idea being that if someone  deliberately defaults in one area of tax then they may be defaulting in another area and as such they must expect enquiries into all their relevant areas of tax;


• Accountants call the next point ‘To be spied upon’ - HMRC are a little more polite and refer to this as ‘observing and recording the defaulter’s business activities’ and ‘making test purchases’ then checking them against the records.


If any of these checks turn up further deliberate defaults, the taxpayer may risk criminal prosecution. The worrying point about this ‘new’ system if that even if the ‘defaulter’ owns up completely he is still likely to be continually monitored by HMRC’s specialist unit for years to come.


Further, if a ‘Deliberate Defaulter’ has a controlling interest in a business, then that business may also be placed in the new programme, meaning that if you are a minority shareholder in a private limited company and the MD fails to mention that account he has in the Channel Islands then you may find that the business you go to every day is required to keep perfect records:


• Even the smallest amount of tax evasion could result in being included in the ‘new scheme’. 


• The £5,000 ‘Deliberate Defaulter’ understatement threshold amount is relatively low for many resulting in additional reporting to HMRC.


• This new scheme is in addition to and will work alongside the potential publishing of names of those taxpayers with deliberate understatements that result in a tax loss in excess of £25,000.


Practical Tip


The HMRC Release announcing the new scheme stated that ‘Generally speaking, deliberate default will be identified where a penalty under Schedule 24 FA07 or Schedule 41 FA08 for Deliberate Understatement (DU) or Deliberate Understatement With Concealment (DUWC) has been charged and is final. However, other instances of deliberate evasion may be identified through specific disclosure campaigns run by HMRC, Civil Investigations of Fraud and where a person has been convicted of a criminal offence involving tax evasion.’


We have been warned.


This is a sample article from the monthly Property Tax Insider magazine. Go here to get your first free issue of Property Tax Insider.