The HMRC selection process is geared to identify areas of risk that present the scope for cash extraction or cash manipulation. They are starting to recognise within businesses the opportunities that provide the scope for additional earnings: for example, manufacturing incentives, proceeds from scrap tips etc. Cases are often benchmarked with comparable trades and those presenting the highest risk often form part of the enquiry programme, or are selected initially for a compliance check. If you are selected for a compliance check, you should inform your accountant as soon as possible.
HMRC is charged with policing the Self Assessment system. The selection process determined by risk is totally divorced from the person who is allocated the case to work. Once selected, it is virtually impossible to close the enquiry until the risk areas have been fully addressed. However, there are steps that can be taken now to put yourself, your accountant or your specialist adviser in the best position to ensure the best defence of your case:
1. Record-keeping (cash)
- Ensure that business cash receipts can be fully accounted for. Your control of cash should be by a written record (to a standard that would be expected from a bank cashier). Balance the cash regularly and, if feasible, have it checked and certified by someone not responsible for the initial collection of the cash receipt.
- Note the method of payment on each invoice.
- Ensure that a written record of cash withdrawals is maintained (even if you are the sole practitioner), whether it is for materials, personal use or petty cash.
It is often more difficult to defend cases that surround what is often termed a ‘cash trade’ where the control of cash is weak. Self Assessment places the onus of proof on the taxpayer. How satisfying would it be to have strong cash control to defend any challenge?
Do contact your accountant for advice.
2. Help us to help you fight an HMRC enquiry
I have said that HMRC is now wise to the fact that some businesses attract the possibility of ancillary receipts.
- Keep a record of any such receipts and ensure that your accountant is aware of them, no matter how insignificant. HMRC gathers and distributes information from its working cases and one small transaction not included can often lead to wild assumptions from HMRC.
- If an arrangement is in place with a contractor that (for example) he provides transport in return for removal of old machinery (or other non-monetary transactions), it is good practice to make a note of this on the job card in case it is needed in the future.
- If in your trading year you have offered incentives/discounts/special offers, ensure that you keep the promotional literature with your business records. That literature can support an explanation in the event of an HMRC challenge to your profit achievement compared with others or with your past profit margins.
- An old time favourite with HMRC is to challenge private elements of motoring expenses. Get into the habit of noting business mileage in your diary or appointments book. Do not throw these away at the year end, no matter how untidy they are. Keep them with your business records for at least six years.
- If capital is introduced into the business or your private account, you should note the source on the statement. Several years later it is often difficult to remember. Good practice is to keep a record of balance transfers when one account closes and another opens. HMRC can easily identify what accounts you have or had.
- All of the above relate to sole traders, partnerships and limited companies. In addition it is important that as a director of a company you keep a record of all company business even if you are the 100% shareholder. This record extends to the voting of dividends, tax planning etc.
- Increasingly, HMRC is showing more interest in what it perceives to be failures to operate PAYE. It is therefore important to ensure that systems are in place so you can demonstrate to HMRC you have used reasonable care in establishing that the employee’s credentials are genuine, and that you have operated in accordance with the PAYE guidelines. You should always complete form P46s for new employees who do not have form P45s, and ideally you should copy your employee’s identification documents for your file.
3. Disclosure opportunities
In addition to its normal selection process, HMRC is targeting specific trades by offering them the chance to disclose irregularities for a reduced ‘penalty’. We have already seen approaches to the medical profession, restaurant owners and plumbers and we wonder what professions or trades will follow. Briefly promoted in the press and HMRC websites are opportunities for a disclosure with the promise of no criminal prosecution and a fixed (often reduced) penalty. When offered, strict deadlines have to be adhered to and a full disclosure has to be made. HMRC tends to have done its homework and will have specific intelligence. It is now starting the process of contacting those people who have not taken up these disclosure opportunities.
The worst thing you can do is to ignore any letters. Speak to your accountant who will probably contact a specialist firm such as AVN Venus Tax LLP to represent you in negotiating a focused late disclosure.
There is a facility available that can be used in making a voluntary disclosure if an overseas asset was held as at 31st August 2009. By using this facility it is possible to restrict the liability to ten years and make substantial savings on the penalty chargeable.
I have dealt with many people who have been challenged by HMRC for understating or failing to notify their chargeability to Tax and VAT. What I have found is that, once the disclosure has been made, the client finds a degree of peace!
Code of Practice 9 Enquiries
This type of enquiry is serious. Enquiries of this type are where HMRC suspects fraud but is prepared, subject to a full disclosure, to settle the case for the tax due, an interest charge for late payment and a penalty. The enquiry can span 20 years and requires specialist assistance. Never go into such a meeting without support.
Every problem can be solved and a little care taken now can protect you for the future.
For more information, email me or ring 0844 8111 306 / 07884 261 517.