Never paid tax....

sirmyser

Hi,

I have just read the thread @ Main site > MoneySavingExpert.com Forums > Pure Money > Cutting Tax > Partner has never paid tax and it produced some very interesting and informative replies to a very similar problem that my ex-brother in law has (no - it's not really me). So taking this into account, and the 'severity' of the issue I will post it here with a view to hopefully formulating a way forward for him. Here's the details:

He has been self-employed for the last 9 years and contriubuted his last NI contribution around Apr 2001 :embarasse also his last efforts to submit any sort of return were around that time also :embarasse.

This means that he has had 'sole trader' status since about this time. Taking into account what was said in the above post I have put to him the following:

• If (or when) the tax man catches up with him he 'could' be be subject to criminal prosecution.
• If he approaches them first that this 'may' reduce the posibility of a criminal prosecution significantly.
• By engaging either a solicitor and/or and an accountant would result in his 'non-tax paying activities' being reported to NCIS (or whoever they are now obliged to inform).
• That he would inevitably have to engage an accountant and/or solicitor when he contacts them regarding this matter
• That (as he has no records) he should get details (statements)of his business accounts either in statement form or electronically (if possible?) in an effort to asess what the gravity of the situation, i.e. he seems pretty sure that he hasn't exceeded the V.A.T. turnover for any one year (another issue I know)

Ok, I put this out here to be 'pulled apart' and I know he hasn't paid tax for a significant amount of time but he just wants to come clean now. He has joint custody of his two children so this is an added concern. He has not been the paperwork type and I believe it not to be 'intentional' etc. and I know ignorance is no excuse - so all the 'stone throwers' need not reply. All advice on this will be GREATLY appreciated.

Myser

John_Pierpoint

A neighbour of mine "emigrated" in this situation.
There is also a rumour circulating that he as died.

Does he have any appreciable assets or will he be facing bankruptcy?

GtiTory

its literally if the tax man catches up on him and if he gets grassed up.
the tax man has bigger fish to fry so unless given a tip off, he may never get caught.
if caught, they would pro rata all his tax from his last years profit and he will have to pay it back based on this year, plus fine/prosecution
the kids side of it, yeah its a worry but he knows right from wrong so your research will just be a "told you so"
my boyfriend has just registered as self employed, although its a different kind as he is in the construction industry he is a sub contractor so he has paye
your bro-in law cant now close his business and re open because the tax man will just say, hold up how have you afforded to live all these years, although i do wonder how hes afforded due to the money laundering rules, you cant even buy a car at auction over 3k (or 5k maybe) cash.. the banks have a keen eye on everyones accounts.
both of my parents are self employed, my mum works for herself and my dad owns a company so i have asked a lot of questions and thats why i know the info

Gertie_Walker

Having read previous threads on here, I am sure you know the anser is to take his problem to an accountant and ask him to negotiate with HMRC on his behalf. HMRC will probably not call for accounts for all 9 years - they are most likely to want to settle based on increase inassets for earlier years. The longer he leaves it, the worse it will be.
It is not the policy of this board to encourage people to evade tax.

PlutoinCapricorn

There have been several similar cases on MSE. I am sure it must be a relief for the people involved to get things out in the open and stop living with possible detection hanging over them all the time.

Everyone seems to agree that coming forward and confessing does reduce possible penalties, as does co-operating with HMRC.

There will be the outstanding tax to pay, also interest and possible penalties. Have you any idea how much tax will be involved - a payment plan might be acceptable to HMRC?

What did he do with the P45 that he was given in 2001: HMRC should have picked up something here as it seems that he did not actually register as a sole trader?

Pennywise

sirmyser wrote: »

By engaging either a solicitor and/or and an accountant would result in his 'non-tax paying activities' being reported to NCIS (or whoever they are now obliged to inform).

As long as he tells the accountant/solicitor he wants to come clean, and agrees that the accountant/solicitor makes contact with HMRC then they don't need to report to NCIS.

I'm a practising accountant and this kind of thing happens occasionally. As soon as someone comes to me and tells me they want to come clean, the first thing I do is send a letter to HMRC telling them of my appointment and telling them that there is a situation of undeclared tax and that I'm working on the case and will provide fuller details within 10 weeks. I never give any idea of the nature of the underdeclaration, how many years, the quantum nor likely tax due. This "buys" time to do the number crunching and protects the client in case HMRC were about to open an enquiry as it would constitute "voluntary" disclosure, hence far lower penalties, even though no actual details have been given.

I've never once had HMRC disagree with this course of action - in fact the tax inspectors are quite happy to sit back, let me do the donkey work, and then do a bit of horse-trading at the end with the inspector as to the penalties - they can usually be halved from the inspector's first offer, though, of course, the tax due will always stand and isn't negotiable. The inspectors tend not to be too bothered about trying to dispute whatever figures we put forward as long as they are reasonable - in fact, these "multi year" voluntary disclosures are often quicker and easier than where the tax inspector picks a case for enquiry. After all, whatever the tax and penalties is "money for nothing" for the inspector - he's had to do virtually no work and it looks good on his record for promotion prospects etc i.e. it increases his "recovery" rate.

He needs to go to see a good accountant straight away. That kind of time period of no disclosure can indeed lead to criminal prosecution if HMRC find out about him before he comes clean. There is no "reasonable excuse" here - he used to submit tax returns so he can't claim ignorance (not that ignorance is much of a defence anyway). You also have to think how he's got away with it for so long - usually it's because HMRC have been told that trading has ceased (clearly a lie and won't look good) or that he's just moved house and they've lost track of him - that means that his "tax record" still exists, showing unsubmitted returns and unpaid fines and determinations -in fact HMRC could well have filed for his personal bankruptcy and he may know nothing about it!

This isn't going to go away - HMRC don't "forget" - as soon as something triggers it's resurrection (i.e. claiming state benefits) it will all come flooding back. Dieing, bankruptcy or permanently emigrating are the only sure fire ways of the file being closed.

Does he own a property? If not, and he has no other significant assets and can't afford to repay thousands in tax, bankruptcy may well be the preferred option for him, especially as his tax debts could easily amount to tens of thousands of pounds if he's been making even an average profit over such a long period of time, compounded with upto 100% penalty and interest! He could come clean to HMRC and make full voluntary disclosure to avoid criminal prosecution and then once HMRC raise their assessments and start sending demands, he can file for bankruptcy - not a very moral way forward, but if he can't pay, he would otherwise probably spend the rest of his life working for the tax man and be far more likely to simply give up, go on the sick etc - he'd be better wiping the slate clean and going on to continue working and earning a living and paying taxes.

Mahmood_Reza

The key point is to confront the issue head on and make a voluntary declaration before HMRC find out - this will reduce any potential penalties and bring HMRC more on side. In order to keep professional fees down start collating all documentary evidence of income and outgoings in order to compile a schedule of profit and loss for each year. My record is dealing with an individual who had 21 years where he hadn't declared!

Subject to the estimated profits and cash availabiliity make payments on account - this will help keep interest payments down. Interest will be due on unpaid tax from when it was due to when it is paid, for example tax on any income for (say) 2001-01 would have to be paid by 31.01.02. If that tax is paid in say Dec 2010, that will be approx 8 yrs interest - there will also be penalties, e.g. late filing.

Subject to the reasons for the non declaration you may not need to file for all nine years, in certain circumstances HMRC may only go back 6 years. Easy to say but try to keep your anxiety levels at a minimum, in my experience once the declation is made it seems to lift a heavy burden - albeit it may be replaced by finding the money to pay the tax!

sirmyser

Hey thank for all your swift replies! Taking into account what has been said it is now quite clear what his course of action should be. As far as his current situation is concerned he has a house worth 115k with a 3 year old 120k (self cert) mortgage.. and he has 1,500 outstanding on his car which is worth 8k ish. He has a work van worth 2k with all the tools of the trade in it. He has no other significant assets. However, he was recently burgled (quite badly) and as I understand it has between 5 - 10k's worth of vouchers due for replacement goods. The discussion with me was initially based on the fact that he has between 40 - 50k's worth of unsecured debt that he has started to default on, and my initial advice was bankruptcy based on his current situation (IVA not really feasible). However, after taking into account his tax situation I told him that he really needed to take the bull by the horns and get it ALL sorted out at the same time, but my knowledge of the tax man is somewhat limited in relation to this particular situation hence me reaching out to you MSE experts - its messy - I know..

They may be some other considerations then in relation to the above, but the best thing he can do is now find an accountant similar to Pennywise to help him out of this mess


Myser

laticsforlife

Pennywise wrote: »

and then do a bit of horse-trading at the end with the inspector as to the penalties - they can usually be halved from the inspector's first offer

After all, whatever the tax and penalties is "money for nothing" for the inspector - he's had to do virtually no work and it looks good on his record for promotion prospects etc i.e. it increases his "recovery" rate.

Just pulled 2 parts of your answer Pennywise,

The negotiating of penalties just got a whole lot harder as there is a limited range, and in many cases the minimum penalty will be 35% whereas in the past we may have jointly negotiated down to around 10% or 15%

As for money for nothing, I suppose this is true (I'd let you do the donkey work too if you were willing to), but it would not likely do much for any Inspector's prospects as there aren't any prospects any more! Take a 2-year pay freeze, and all the austerity cutbacks (no recruitment, virtually no promotions) means there is little or no incentive for any HMRC staff to perform aggressively (there are no individual targets for strike rate anymore) its all about getting it right, at the right time (all nicey nicey).

Mahmood_Reza

A greater deal of the tax collection is being outsourced to 3rd part debt collectors, who are not tax office staff. Over the last few years the tax gap (total tax estimated to be generated and actually collected) is getting bigger and there is more emphasis on complance.

Pennywise

laticsforlife wrote: »

The negotiating of penalties just got a whole lot harder as there is a limited range, and in many cases the minimum penalty will be 35% whereas in the past we may have jointly negotiated down to around 10% or 15%

Re penalties, I think the new regime gives more scope for negotiation and the penalty ranges are actually quite wide - probably wider than before. In this case, if HMRC were to go for "deliberate and concealed", the penalty range is 30% - 100%. With full co-operation and full disclosure from the client, I'd be arguing with the tax inspector for the penalty to be at the bottom end of the rangem, whilst I'm sure the tax inspector would start negotations at the top end. I think a penalty of just 30%, or even 40-50% would be a very good result for a case like this. I've certainly never seen penalties any lower, even under the old regime, for prolonged and repeated tax evasion of this manner.

laticsforlife wrote: »

As for money for nothing, I suppose this is true (I'd let you do the donkey work too if you were willing to), but it would not likely do much for any Inspector's prospects as there aren't any prospects any more! Take a 2-year pay freeze, and all the austerity cutbacks (no recruitment, virtually no promotions) means there is little or no incentive for any HMRC staff to perform aggressively (there are no individual targets for strike rate anymore) its all about getting it right, at the right time (all nicey nicey).

Nice thought, but not borne out by reality in my experience. Too many tax staff of all levels and grades, whether incentivised or not, tend, in my 25 years of dealing with them, to be aggressive and automatically biased against the taxpayer. If they were all "fair" and "nicey nicey", there wouldn't be high (if not record) numbers of complaints, tribunal hearings, court appeals, seemingly most of which result in the taxpayers favour! Whether or not there are formal procedures in place for "performance", tax inspectors will always "like" a quick win and even if it isn't written down on the inspectors record, it will be noticed by their immediate line management etc and no doubt remembered when it comes to promotion (inevitable in the medium term) or consideration for redundancy (again inevitable) - just because it's not officially recognised doesn't mean it doesn't matter in reality.

The other point about quick wins is that the inspector probably doesn't have the time to delve into too much detail and spend a lot of time on it. Lower inspector levels are basically given work lists to complete and don't seem to have much discretion anymore. A taxpayer appearing with a voluntary disclosure won't have been on their planned work list and has the potential to slow them down on other allocated/scheduled work, possibly affecting their performance indicators if they can't meet deadlines etc.

My experience (of handling several full blown tax enquiries every year for 25 years), is that if the tax inspector instigates an enquiry, it is usually long drawn out, very detailed, very intrusive and often difficult to convince the inspector away from their preconceived ideas (especially if they're newly promoted!) - such enquiries can easily last several months if not years, and (again my experience) produce relatively little in terms of tax recovery. In contrast, where we go to the inspector with a voluntary disclosure, it's usually all over within a matter of a couple of months and with the minimum of interest from the inspector who generally just take our word as long as there is sound logic for the figures put forward. My experience is that the inspectors simply aren't as bothered about delving too deep with voluntary disclosures - as long, of course, that the figures being put forward aren't pathetically ridiculous!!