How much power does the tax man actually have?

MrCarrot

I must admit my dealings with the tax and VAT man have always been virtually painless. They've always treated me fairly, paid me money when I'm owed and gladly taken my money when I've owed them. That said, I've never been subject to an investigation.

It's got me thinking recently, how much power do they have when it comes to an inspection? You hear a lot of "stories" saying basically they can do what they like and their decision is final. However someone else told me recently they are not above the law, you are innocent until proven guilty and the burden of proof is on them, not you (this all sounds reasonable). I'm sure during an inspection if they feel you've been defrauding them they'll take advantage where possible and use your fear against you - however that's psychological power as opposed to legal power.

Some would argue if you have nothing to hide then you have no reason to not co-operate - that's not what this question is about. It's about what powers HMRC have, what proof they have to provide if they think you've not been paying enough tax, and where they (and you) stand legally if you disagree with their findings.

I'd like honest facts only, not opinions or stories from mates down the pub! Thanks :beer:

Pennywise

There are two main areas - one is where you're simply getting things wrong, i.e. claiming too much VAT by mistake, wrongly thinking some of your sales are VAT free, thinking a worker isn't an employee when they are, claiming what you think are valid expenses which arguably aren't etc. All that kind of thing is basically just a matter of differing opinions.

The area I assume you are meaning is them arguing that you havn't declared all your taxable income. They have to have some logic/reasoning to think this before they can go down the in-depth enquiry route. Such reasoning can be that you're basic book-keeping isn't up to scratch (i.e. differences and ommissions that they can easily find), or a mis-match between your living standards and declared income, or your business sales/profits being unusually low compared to other similar businesses, etc.

Assuming you're running a business, they have many ways of making "their case", such as applying industry-average percentages for gross and net profit to your turnover or purchases, or taking your purchase invoices and modelling your business using the selling prices to create a theoretic model of your sales/turnover based on purchase invoices to compare against your declared sales. They can also do other "clever" things, like if you're a fast-food outlet, they get the number of plastic trays from your purchase invocies and then apply an average "sale" price per tray to arrive at a theoretical turnover. They can also actually visit your business premises undercover and make notes of how many customers you have, average spend, etc - they do this often with pubs and fast-food outlets.

They can also require you to prepare "statements of assets" over a time period, i.e. to declare what you had at the start of a year and what you had at the end, i.e. houses, cars, expensive fixtures & fittings, etc., then you declare your personal costs, such as holidays, food, household costs, gifts, clothing, entertainment, etc., and compare all your outgoings and investments against your declared income.

So, basically, if they can put forward a "starting point" for a full in-depth enquiry, i.e. that your margins don't look right, or your living standards appear to high for your declared income, then yes, they can go deeper to try to prove that your lifestyle isn't supported by your declared income.

It is a two-way street. They can't argue that you've underdeclared your income if everything stacks up and looks sensible. But if they can find an opening, then yes, they can dig deep and then it's up to you to counter their claims, which you can usually only do by providing them with evidence that they're wrong and you're right. So, yes, there is a burden on the taxpayer to prove they've declared everything, but really only after the tax inspector has some evidence to suggest otherwise.

MrCarrot

Thanks for your reply. What you have said makes perfect sense.

I run a business and for me the book keeping side of things is pretty clear cut. I think it's unlikely the tax man would argue I'm doing anything wrong with regards to recorded expenses and sales.

What I find more worrying is that the tax man can (allegedly) look into your personal lifestyle and hit you with extra tax (based on the assumption you're living beyond what you've actually declared). I appreciate if you claim that you earn £15k a year and then they film you undercover driving round in a Ferrari and find out you own a mansion it's probably going to be fairly clear cut.

However, without such an extreme example, if they investigated your company and everything appeared to be in order, I assume you could refuse to answer lifestyle questions or provide your personal bank statements for interrogation? If they asked for a breakdown of how often you go to the cinema, how much your mortgage is, when you got paid and how you spent it, etc, etc, etc - while it would be possible for the tax payer to prove his innocence I can imagine it would be a nightmareish situation in terms of the time required.

This all probably sounds like I'm paying very little tax and own a yatch in the south of France, which I can assure you is not the case :rotfl:I don't think any business owner relishes the thought of a tax inspection so I am more curious than anything.

Rolo_Tomasi

MrCarrot wrote: »

you are innocent until proven guilty and the burden of proof is on them, not you (this all sounds reasonable).

Unfortunately this is not correct. The onus is always on the taxpayer to prove their Return is correct. The best way to do this is to keep adequate records however no matter how clear cut you believe your book-keeping system is, in most cases the Revenue can find sufficient holes in it to enable them to ask for items such as private banks statements and lifestyle questionnaires.

fengirl_2

If they asked for a breakdown of how often you go to the cinema, how much your mortgage is, when you got paid and how you spent it, etc, etc, etc - while it would be possible for the tax payer to prove his innocence I can imagine it would be a nightmareish situation in terms of the time required.

As an ex Inspector of Taxes, this is what finally did it for me - asking how much people spent on Christmas, etc. I once interviewed a builder with his small child in attendance. When it got to the bit about holidays, he said his last holiday had been somewhere quite basic, but the child piped up 'and we went on the big boat'.......the taxpayer froze and you could have cut the air with a knife.....until mummy remembered that it was a ride at the funfair!

MrCarrot

fengirl wrote: »

If they asked for a breakdown of how often you go to the cinema, how much your mortgage is, when you got paid and how you spent it, etc, etc, etc - while it would be possible for the tax payer to prove his innocence I can imagine it would be a nightmareish situation in terms of the time required.

As an ex Inspector of Taxes, this is what finally did it for me - asking how much people spent on Christmas, etc. I once interviewed a builder with his small child in attendance. When it got to the bit about holidays, he said his last holiday had been somewhere quite basic, but the child piped up 'and we went on the big boat'.......the taxpayer froze and you could have cut the air with a knife.....until mummy remembered that it was a ride at the funfair!

If they are investigating your business (assuming you're a limited company), do you have to answer any lifestyle questions if you don't wish to? Likewise, if they are investigating you personally, do you have to answer any questions about how your business is run?

If my business was investigated, while I have nothing to hide, I'd be inclined to refuse to answer how much I spend on Christmas presents, or anything else that I don't really want to discuss with anyone else. The thought of having to guess how much I spend at Christmas or how often I have the heating on and guessing wrong, then to be told I must therefore have undeclared income, is somewhat worrying.

Rolo_Tomasi

There are a few reasons why you may be chosen for an enquiry but the main one is that the Revenues computer believes there is a high risk that you are not declaring the correct profit ie your gross profit rate may be lower than the national average for your industry. It may be that you just get asked a specific question about this anomaly which, if answerd satisfactorally, will be the end of the matter. However, in a lot of cases you will not know what the issue is.

In these instances the enquiry will follow a set procedure with the first step being a request for you to send all of your business records to the Inspector who will then analyse them and ask questions. Some of these questions will be asked to determine how much income you require to live on and if your business can support this however, if your records and explanations support all the entries on the Return and clear up any issue the Revenue had then they will not require any detailed information.

There is a new Taxpayers Charter which is about to be published and hopefully this will be used to stop any Revenue 'fishing expdtitions' as it contains a promise that taxpayers can expect HMRC to treat them as honest.

fengirl_2

Jimmo is right, its very easy to find a hole in business records.
Its not very well known that you are not required to attend a meeting with an Inspector, although it wouldnt look very good in terms of co-operation if you didnt. As I always tell my current charity clients, the Charity Commission actually has more power in this regard.

MrCarrot

fengirl wrote: »

Jimmo is right, its very easy to find a hole in business records.

I can imagine that is true. However if the tax man believes the £100 you spent on cleaning products for the office was actually spent on cleaning products for your home, how could you possibly prove the polish and cloths were used on your desks at the office and not your coffee table at home? How could he prove otherwise? And would the outcome be that he land you with a bill for £30 based on this, or worse?

fengirl_2

It would be a very desperate tax person who was relying on adjustments for cleaning products!