Few tax returns are investigated by HMRC with the majority being accepted as honest and accurate. When HMRC investigate the tax return of a small business the inadequacies of the accounting, lack of knowledge by the enquired and professionalism by the tax inspector often results in a higher tax bill.
A solid system of bookkeeping accounts provides the basis to defend any tax investigation. When the tax enquiry questions can be answered quickly and effectively from existing third party documentary evidence the tax inspector will gaiun confidence that that search is less likely to reveal a higher tax bill.
Despite the best intentions of a small business the tax enquiry that small business faces is undoubtedly an investigation between a businessman naïve in the thousands of statutes and taxation regulations against a professional tax inspector trained and experienced in where to find the loopholes. The match is akin to a junior football team taking on a team of professionals.
The difficulty most small business has to deal with is apparently innocent questions from the tax inspector the answers to which cost the tax payer money. The tax inspector may ask numerous questions to which the tax payer does not necessarily have to answer or agree to. The solution is always to stick to the solid bookkeeping facts as shown in the accounting records.
Under UK law there is no regulation stating that a tax payer has to attend a meeting with the tax inspector. Meetings with tax inspectors can result in many questions being asked which increase the tax liability from lack of knowledge of the tax rules and sheer frustration by the small business to get the job done and over with. Tax meetings with offical bodies such as the tax authority are often best conducted by felloow tax professionals acting on behalf of the small business.
If the small business accepts a meeting with the tax inspector it is important to prepare for the meeting correctly. Such preparation would involve reviewing all bookkeeping records prior to the meeting and arranging them in a reasonable order, double checking the accounts do not contain any obvious errors and also obtaining from the tax inspector prior to the meeting a detailed note of all areas to be discussed.
The tax inspector will often suggest a meeting at the business premises or the tax payer home. The tax inspector does not have a statutory right to enter the business premises and can do so only by invitation or warrant. The legislation regarding visits to business premises is to be changed from 2009.
Tax inspectors are observant and on visiting the premises will assimilate many areas to be investigated by simply looking around or idle chat with members of staff. When a tax inspector is invited to the home the general lifestyle of the tax payer would be assessed in relation to the profits declared.
There are many examples of how a tax inspection can determine the validity of the accounting records. This list is almost endless.
A visit to a public house might reveal catering sales which had not been declared. A takeaway retail outlet may have a large stock of cartons that subsequently could be checked against purchases and sales. Notices on walls in a reception area might indicate business success that would produce an area to be looked into.
Of course the honest tax payer has nothing to hide but nevertheless such visits can raise many awkward questions that take up time and effort to explain. Many hours of work can be spent producing evidence and discussions which could lead to further difficulties even when there ii nothing to hide.
When a tax inspector writes it is best not to ignore the letters but to respond quickly and factually. Answer questions directly and specifically without opening up further areas for discussion. Ignoring correspondence or avoiding questions leads to more problems than it is worth.
One feature of a tax investigation is to reach an area of the inspection where there is disagreement between the tax inspector and the business. The tax inspector may propose a solution and that solution is rarely in the financial interest of the business. When such proposals are made the negotiation skills of the tax payer or his advisor are paramount.
One area a tax inspector may make a suggestion is to adopt a financial solution based upon a model set of financial results. The business does not have to agree and can enter serious negotiations unless the tax inspector can show reasonable deficiencies in the business financial records.
Just because a tax inspector asks a question does not infer the inspoector has a statutory right to the information. Questions may also be asked that are not specific to the current investigation.
Information requests outside of the scope of the tax investigation and personal records can be denied unless the request is reasonable and relevant to the enquiry. Casual conversations and phone calls can rasie many questions the tax inspector will subsequently investigate to maximise the tax liability.
The conclusion to the best advice when the prospect of a tax investigation is imminent is first of all to prepare solid accounting records, always respond quickly and specifically to the questions being raised. Keep the chats and answers accurate, specific and short and sweet and to the point. Steuerberater Hattingen