I do think HMRC might be over-egging it a bit when it comes to tax enquiries at the moment. It’s been reported that HMRC recovered £179 million as a result of enquiries into tax returns in one year alone.
Over recent years HMRC have become more and more determined to discover tax discrepancies. There’s nothing wrong with that in my view, if they are tackling people who are making false claims or trying to fiddle the system. But unfortunately it also means than many innocent business owners and self-employed individuals are being caught-up in complex and time consuming tax enquiries. Apparently around 1 in 10 people completing a self-assessment tax return will be investigated. The frightening things is HMRC have sweeping powers to look into all aspects of your business and personal financial affairs and in real terms they don’t have to justify or explain why they are launching an investigation.
With new sweeping powers it’s not a case of if, but when, you will face a tax investigation.
Talking to the providers of our tax investigation fee insurance product I learned that claims increased 42% in the 12 months to February 2011 and they show no signs of abating. I guess at least these businesses were covered by insurance and didn’t need to find the money to pay their advisors to assist with the investigations, which are always time consuming and complex. But we’ve also heard of cases where business owners have given in to HMRC demands simply to avoid the time and costs involved in continuing to fight their case.
With the need for the Government to get hold of as much revenue as it can I don’t see much hope for a reduction in the number or nature of tax enquiries in years to come. The only advice I can give is to keep proper accounting, VAT and personal tax records and consider taking out insurance against any tax investigation you might face. At around £150 plus VAT per year it’s money well spent.
Andy Parker
Chartered Accountant, Birmingham