The View from No 50
K P Bonney & Co
Chartered Accountants and
Chartered Tax Advisers
Ilkley LS29 6JA
Tel: 01943 870933
Fax: 01943 870925
INLAND REVENUE ENQUIRIES
The Inland Revenue can make enquiries into the tax return of any individual. Even the most honest people can be selected for an enquiry. So, if you are unlucky enough to get an enquiry what, apart from getting good professional representation, can you do to minimise the cost and inconvenience?
There are a number of things you can do to help yourself.
Here are some of the most frequently asked questions and observations which we encounter in the context of Inland Revenue enquiries.
When can the Revenue open an enquiry into my affairs?
You have to submit your tax return to the Inland Revenue by 31 January following the end of the tax year. This date is called the filing date.
The Inland Revenue can open an enquiry into your affairs at any time up until the anniversary of the filing date.
So if you file your tax return as late as possible i.e. on the filing date, the Revenue has twelve months in which to open an enquiry.
If they do not make an enquiry within that time, their opportunity is gone and your tax return becomes final. At this point the enquiry window closes.
That is it closes if you have not been negligent or fraudulent in the preparation of your return. If you have been negligent or indeed fraudulent and the Revenue discovers this fact then it can open an enquiry into your return even after the enquiry window has closed.
That doesn’t sound good. Is there anything I can do to prevent this happening?
If you have been honest in preparing your tax return you have nothing to worry about (although see the following article about discovery). There are, however, instances when the tax treatment of a particular receipt or payment is genuinely uncertain. This is where your professional adviser earns his crust.
If I file my return early does this mean I am more likely to be selected for an enquiry?
The Inland Revenue assures us this is not the case. Selection of cases for enquiry is made centrally, not locally. The Revenue selects for enquiry those returns which it perceives as risky. It also selects a number of cases on a completely random basis.
I have completed my tax return. Now how long do I have to hang on to my financial records for the year?
Well the answer is “it depends”. It depends on whether you are self employed or not.
If you are self employed you have to retain the records on which your return is based, business and private, for a period of five years starting from the filing date.
If you are not self employed the retention period is one year from the filing date.
I am self employed. It really is inconvenient having to hold on to my records for so long.
That is understandable. However, that is the law and you can actually be penalised (up to £3,000) for not retaining your old records. Remember also, if the Revenue opens an enquiry into your tax affairs, your records are your best defence. They demonstare that you have made a full disclosure in your tax return. If you can produce your records quickly it follows that any enquiry should be closed quickly too.
As banks are known to charge £10 per sheet for duplicate bank statements, it really is a false economy to throw old records away.
Is there anything else I can do to help myself in these situations?
There are a number of things you can do.
Take a look at your private bank statements or building society passbooks of a few years ago. Look at the deposits. Ask yourself where the money came from. Can’t remember? That could be a problem. Whilst there is probably an innocent explanation for each deposit the Inland Revenue’s attitude is that unexplained bankings are undisclosed income. With tax of up to 40%, penalties and interest you could end up paying the Revenue an amount equal to the unexplained banking.
The answer is to get into the habit of making notes on your bank statements and passbooks to remind yourself where incoming money has come from.
Wherever possible, pay for goods and services by credit or debit card rather than cash. The card issuer sends you a periodic statement. This statement is a valuable record. It shows the kind of lifestlye you lead. This in turn helps to demonstrate that you are living within your declared means. If you pay for most of your requirements by cash you create no trail so it is more difficult to demonstrate just what lifestyle you lead.
If the Inland Revenue finds out that a taxpayer has acted negligently or fraudulently in preparing a tax return for a year for which the enquiry window has closed, it is said to have made a ‘discovery’. In these circumstances it can make a ‘discovery assessment’ to capture the tax which would otherwise be lost.
Discovery was the point at issue in the recent Court of Appeal tax case of Veltema v Langham.
The facts, briefly, were that Mr Veltema was the sole director of a company owned by himself and his wife. The company owned the house in which they lived. In March 1998 the company transferred the house to Mr Veltema for no consideration. Professional valuers advised Mr Veltema that the house had a value of £100,000. He reported this amount as income in his tax return. The company reported the benefit on form P11D and its own disposal of the property in its corporation tax return.
The inspector of taxes responsible for the company’s affairs made an enquiry into its return. The Valuation Office advised him that the house was worth £165,000. Eventually the Valuation Office and the representatives acting for Mr Veltema reached agreement at a valuation of £145,000.
This information was passed to the inspector responsible for the personal returns of Mr Veltema. By now the time limit for opening an enquiry into Mr Valtema’s return had passed.
The inspector raised a discovery assessment against Mr Veltema for tax on additional income of £45,000.
The Revenue accepted that Mr Veltema had acted neither negligently nor fraudulently. He had reported what he thought was the true value of the house.
The Revenue claimed they were entitled make a discovery assessment because the valuation used by Mr Veltema was wrong and the insufficiency of the valuation used by Mr Veltema had not been drawn to their attention in his return.
Mr Veltema claimed that the information in his return and the P11D was sufficient to enable the Revenue to judge that the amount declared was insufficient. The Revenue failed to make use of this information within the time allowed. It could not now claim to have made a discovery.
The Court of Appeal sided with the Inland Revenue.
It stated that the aims of the self assessment system are simplicity and early finality of assessment to tax. However, the Revenue is only shut out from making a discovery assessment if the taxpayer, in making an honest and accurate return, clearly alerts them to the insufficiency of the return.
This is something of a contradiction.
The decision is most unsatisfactory because it deprives all honest taxpayers of the certainty they thought they had acquired about their affairs for ‘closed’ years.
We understand a fighting fund is being organised so that an appeal can be made to the House of Lords. Hopefully the Lords will overturn the decision of the Court of Appeal.
MORE FOOTBALLERS AND MORE BARS
A guy walks into a bar and leans over to the next guy and says, “Want to hear a joke about footballers?”
The guy next to him replies, “Well, before you start you should know that I’m 6 feet tall, 200 pounds and I’m a footballer. And the guy sitting next to me is 6 feet 2 inches tall, 225 pounds and he’s a footballer too. Now, do you still want to tell that joke?”
The first guy says, “No, I don’t want to have to explain it twice.”
Copyright Ó K P Bonney & Co LLP 2004. All rights reserved. No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers. Disclaimer The publishers have taken all due care in the preparation of this publication. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or the publishers.
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