Tax investigation stresses.

PlutoinCapricorn

Mr Moon, I read about a journalist who underwent a full investigation (as opposed to an enquiry), and he was given a very hard time. Reading the story quite frightened me, even though my records were accurate and complete and I would never hide income nor inflate expenses. I guess that conscientious people might feel particularly stressed by such an experience.

http://www.taxinsider.co.uk/327-Escaping_a_Tax_Nightmare.html

Pennywise

PlutoinCapricorn wrote: »

Mr Moon, I read about a journalist who underwent a full investigation (as opposed to an enquiry), and he was given a very hard time. Reading the story quite frightened me, even though my records were accurate and complete and I would never hide income nor inflate expenses. I guess that conscientious people might feel particularly stressed by such an experience.

http://www.taxinsider.co.uk/327-Escaping_a_Tax_Nightmare.html

Whilst that case went drastically wrong, it's important to remember that the guy submitted his own tax returns which contained clear errors, such as claiming his personal drawings as a business expense, as he decided to do his own tax returns instead of getting an accountant to help him. He put notes on the return saying he wasn't sure what he was doing and thought that doing so would be fine, i.e. basically handing over his lack of knowledge (and unwillingness to pay an accountant) to HMRC. That's not how the system works. At the very least, he could have phoned HMRC or visited one of their offices to ask for advice before he submitted an erroneous tax return. Late returns or obvious errors in returns is one of the major triggers for HMRC launching an enquiry - both these issues are clearly in the hands of the taxpayer, i.e. submit them on time and make sure they're right, either by doing the research yourself or engaging an accountant.

Not saying that HMRC were blameless in the fiasco that followed, but had his tax returns been right in the first place, almost certainly, there'd have been no tax investigation. It's one of those cases where he wasn't entirely to blame for what happened to him, but he could have avoided it.

PlutoinCapricorn

The case is an extreme one, and he brought it on himself I agree.

It seems that there are red flags that trigger HMRC, but people can also be chosen at random.

Mr Moon, are your expected figures realistic ones? A poster advised setting up a limited company, but you were thinking of being a sole trader. The size of the profit is relevant here.

DKLS

PlutoinCapricorn wrote: »

The case is an extreme one, and he brought it on himself I agree.

It seems that there are red flags that trigger HMRC, but people can also be chosen at random.

They do have an algorithm in their computer system that flags up bad on various criteria.

E.g. They have a number of benchmarks for say Florists and what you would expect them to earn in a year, if the latest submission is widely higher or lower than this a flag is raised on the system.
This does not automatically mean they will launch a full on investigation, it just means its passed to another department to look into, and can 9 times out of 10 be quickly resolved with a letter or call.

They also are allocated certain groups to tackle, such as Cash business's, SME's, certain sectors or larger organisations.

As to the OP, don't let the taxman put you off your business, as long as you follow the rules in a timely manner you will be fine, and in the last few years the HMRC has changed massively and they are actually helpful these days and not quite as adversarial if you work with them.

Adlibjac

I used to look after the finances for a business owned by my husband and myself. We had an accountant to help with end of year and tax stuff.

When we had a VAT inspection they wanted to interview me to find out how I kept records and sent out invoices etc. I felt nervous but did not need to as it turned out.

I had always tried (with accounting advice) to keep good and accurate records.

As soon as it was obvious to the inspectors that we were keeping good records and everything was above board they did not probe further. They were very pleasant and helpful and not at all scary.

After all they are just people doing a job.

mr-moon

blondebubbles wrote: »

No idea what the % would be but compliance is where HMRC are putting all their resources so we can expect an increase in investigation in the near future.

Some checks are risked based and some are time based

So there are to be more tax investigations in the future?

PlutoinCapricorn wrote: »

The case is an extreme one, and he brought it on himself I agree.

It seems that there are red flags that trigger HMRC, but people can also be chosen at random.

Mr Moon, are your expected figures realistic ones? A poster advised setting up a limited company, but you were thinking of being a sole trader. The size of the profit is relevant here.

My figures are around 15k to 20k profit. Based on a turnover of around 25k to 30k. I've not really looked into a ltd company as it looks much trickier to set up.

As a small company I would probably get the tax investigation insurance nearer the time, though its not initially the costs that worry me (though I hear they can be very high) its more the stresses of reading how horrible, how intrusive, how long & how guilty until proven innocent they can be.

Not to mention I've read its often the tax man will continue to dig until he finds something then whatever he determines you owe its for you to prove otherwise.

Pennywise

mr-moon wrote: »

Not to mention I've read its often the tax man will continue to dig until he finds something then whatever he determines you owe its for you to prove otherwise.

Only if they believe they have grounds for believing that income has been undeclared. They need a reason. If you declare £20k p.a. income and have a porsche, yacht and multi-million pound house, they would have a reason to suspect evasion and dig a little deeper to find out how you could afford that lifestyle.

If you declare £20k, have a Ford Focus, live in a 3 bed semi and go on holiday self catering to Majorca, they have no reason to suspect you're evading and would have no grounds to start digging, unless they checked your book-keeping and found errors etc suggesting evasion.

zygurat789

Pennywise wrote: »

Only if they believe they have grounds for believing that income has been undeclared. They need a reason. If you declare £20k p.a. income and have a porsche, yacht and multi-million pound house, they would have a reason to suspect evasion and dig a little deeper to find out how you could afford that lifestyle.

If you declare £20k, have a Ford Focus, live in a 3 bed semi and go on holiday self catering to Majorca, they have no reason to suspect you're evading and would have no grounds to start digging, unless they checked your book-keeping and found errors etc suggesting evasion.

And yet I know someone who was investigated twice in three years. Once because he didn't earn as much as the tax man thought he should. They, after all, get paid more than they are worth.
They refused to make his income up to what they thought he should earn after they found no evidence.
The secvobnd time was because his brother did his own accounts and didn't hide what he didn't declare.

mr-moon

zygurat789 wrote: »

The secvobnd time was because his brother did his own accounts and didn't hide what he didn't declare.

Sorry I don't understand this part?

jp1964

The answer to this is very simple, keep accurate records, and use a good accountant. We have two Limited Companies and pay a total of £200 per year for Tax Investigation Insurance, so that we have the peace of mind of knowing that should we be investigated for any reason the accountants will take care of things for us. The yearly cost of a good accountant is well worth it, and saves a lot of unknowing mistakes and a lot of hassle and stress.

When we recently had to prove our income for a loss of earnings personal injury case, the accountant was brilliant, and we were able to prove that our earnings were correct in order to get a settlement.

Hope this helps.