How you can limit the cost of potentially dealing with an uncompromising taxman in the event of a tax inquiry, by Edward Parker FCCA.
As you will have seen in the news in recent months, there has been something of a media frenzy regarding tax avoidance. With the government looking to reduce the deficit in the coming years, the focus of HM Revenue & Customs (HMRC) is on maximising tax collection (tax revenue).
It is for this reason that the likes of Jimmy Carr and Gary Barlow have found themselves in the headlines over their tax affairs in recent years and worryingly for the rest of us HMRC’s efforts are not just limited to the rich and famous. Any tax payer who submits a tax return can be scrutinised whether they are fully compliant or not!
The evidence of HMRC’s efforts
According to publically available data from the Revenue, the number of inquiries made into people suspected of not paying enough tax has doubled in the last two years to 237,215 and this excludes investigations into partnerships and corporate entities. The figure for the previous year was approximately 119,000. Furthermore a record £23.9bn was collected through these investigations in 2013, an increase of £3.2bn on the previous 12-month period and £9bn on three years ago.
Over £8bn has been collected from large business, £1bn from criminals and £2.7bn through challenging avoidance schemes in the courts. HMRC were set a target by Chancellor George Osborne in the 2013 autumn statement of bringing in an extra £7bn a year by 2015, a figure they surpassed by nearly £1bn for last year alone.
How are HMRC enforcing tax collection?
The use of debt collectors and bailiffs has doubled and HMRC has recently requested the authority to be able to extract money from current accounts and individual savings accounts in instances where it believes people owe the state money. They want to be able to do this without the consent of a court order. Stringent penalties are being applied and used to press people into paying quickly instead of challenging bills. HMRC are also using sophisticated software to collate information from a wide range of sources to establish whether any particular inquiry will be cost effective.
As you will have seen from previous posts on this blog, HMRC has set up special task forces that target specific groups and sectors. Examples include buy-to-let landlords, freelancers operating through limited companies and health and well-being professionals among many others. The results have been a sevenfold increase in prosecutions over the past three years.
What can you do about this?
Firstly avoid aggressive tax avoidance schemes and operating through a personal services "limited company" if you are an employee. Secondly, you can do all the usual things such as filing your tax return on time, paying on time and keeping accurate records however, none of this will protect you from an investigation for the reasons stated in the opening paragraph.
You can hire a good accountant to ensure all your records are accurate and compliant but that then means a potential investigation could get expensive in the form of accountancy fees. Given that the number of inquiries will likely increase in the future, a solution for individuals and partnerships within the self assessment regime and companies within the corporation tax regime is to have fee protection insurance in place.
The average fees for dealing with a tax enquiry amount to £2,500 so, signing up to insurance that covers these costs in the event of an investigation ensures the availability of your accountant to work for as long as it takes to resolve your case (subject to your policy limit) at a significantly lower expense to your business.
If you're a Wellers' client then we can provide you with this insurance for a small fee. We'll have sent you communications about this in the past so be sure to contact your partner or team about arranging this.
The content of this post is up to date and relevant as at 29/05/2014.
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