Investigation tips

HM Revenue and Customs investigations are primarily concerned with businesses carried on by sole traders, partnerships and companies. The majority of the UK’s tax revenue derives from these sources; either as Income Tax, Corporation Tax, VAT, or PAYE collected from employees under schemes for which the business proprietors are responsible. Different strategies are adopted by the tax authorities to police businesses, ranging from relatively low key "visits or inspections" to full blown investigations of varying severity, the approach depending principally upon the amount of tax at risk and the strength of the evidence held that irregularities exist.

The vast majority of tax investigations are undertaken with a view to reaching a civil financial settlement which will embrace the tax under-declared, interest for late payment, and a financial penalty calculated by reference to the amount of tax lost. A new penalty regime has being introduced for tax returns which are due to be filed after 1st April 2009; whilst this new system is more severe than that which already exists, in theory it should not be of much immediate concern because tax investigation settlements tend to deal with historical arrears and the greater proportion of penalties ought to be calculated upon the older (more favourable) basis for some time to come.

The new penalties place rather more emphasis upon the manner in which the taxpayer has conducted themselves in relation to the enquiry. It would be very easy for someone to misdirect themselves in relation to the operation of penalties and taxpayers should not allow themselves to be intimidated by the literature which is sent to them by HM Revenue and Customs. Taxpayers under investigation do have rights and there are limitations upon what inspectors can see, do, and how they conduct themselves.

In a typical enquiry, the investigation process will normally begin with an examination of the business records. New legislation came into play during 2009 and Inspectors are now entitled to examine that which is "reasonably required to check someone’s tax position". The records will be examined with a view to establishing weaknesses in the financial systems operated. The investigating officer will not be seeking to demonstrate that everything is in order at your business. However friendly he or she may seem, they are in the business of finding flaws in your accounting records.

Investigation practitioners have historically resisted the provision of private bank information until HM Revenue and Customs can demonstrate they have a prima facie case against you or your company. The new internal guidelines about records are totally silent on the subject of private bank information and Hector Hector will be advising on the same basis as before. Never give your private financial information to HM Revenue and Customs unless you really have to. Credit is seldom given for volunteering information unnecessarily. The best you can expect is a long list of troublesome queries about your bank statements.

Wholesale changes have recently been enacted by HM Revenue and Customs with increased powers to give them right of access to business premises. Worryingly, the definition of "business premises" has been extended to a point which might include the private residences of the owners/directors. Assurances have been given to the effect that officers will be reprimanded if they are too zealous with their new powers. The only safeguards in place seem to be within HM Revenue and Customs’ own internal instructions and "Hector Hector" would like to hear from anybody who has experienced a heavy handed approach, particularly if the new powers are being used to try and gain access to historical information which would not have been available under the old regime.

It has always our preference to arrange for business records to be made available for inspection for a day or so at your accountant’s offices. This is far better than delivering the records to the inspector’s offices for them to examine at their leisure. Whilst the new provisions allow HM Revenue and Customs to insist upon where the records will be made available and give them the right to remove those records; it is understood that a consensual approach is being advocated within HM Revenue and Customs. Hector Hector will continue to seek to have records examinations undertaken away from the business premises. Under no circumstances should HM Revenue and Customs inspect business premises without a professional advisor being present and we would normally advise the taxpayer not to engage with the inspector. A great deal of damage can be caused by an offhand unguarded comment.

At some point during an enquiry the investigating officer is likely to ask for an interview. There is no obligation to attend a meeting. The investigator will have a lot more experience of interviews than either you or your accountant. They will be seeking to trip you up about various aspects of the business records. They may have information they want to confront you with directly. Reflect carefully before agreeing to a meeting. Consider how you will come across. If you think you gain most from a meeting then by all means proceed with it. Before a final decision is made, we would advocate a "trial run" to see how you perform under pressure. If a meeting is declined then your advisor should shoulder responsibility for that decision. Far better for your advisor to say that interviews are declined as a matter of policy, than to hint that you don’t want an interview because you are terrified of saying something stupid! "Hector Hector" will always try and insulate you from HM Revenue and Customs.

Tax investigations come in many shapes and sizes. The links to the left of this panel give additional details to the narrative above. "Hector Hector" offer support in a wide range of dispute resolution issues with HM Revenue and Customs, from relatively straightforward PAYE compliance, through to full blown prosecution cases or complex tax avoidance and planning arrangements which are being challenged. We have the experience to deal with most client requirements but we have accumulated a discreet number of "associates" who provide specialised tax and legal advice to us in appropriate cases so that an all embracing service can be provided. We do not prepare tax returns or accounts and would normally seek to interact with your longstanding accountant for routine support in the investigation process before handing back charge of your tax affairs to them.