James Bailey highlights some ‘do’s’ and ‘don’ts’ to keep in mind when completing tax returns to help lessen the risk of enquiry by HM Revenue & Customs.
There is no ‘fool proof’ way to avoid a tax investigation, because a certain proportion of enquiries are done on a random basis, but these suggestions will minimise the risk of being selected.
Don’t submit returns late
This means all types of tax return, not just the annual self-assessment. VAT returns, PAYE returns under the Real Time Information regime, inheritance tax returns for trusts and for deceased estates all draw attention to themselves if filed late.
Use the ’White Space’
Several sections of the annual self-assessment return have space for you to add any comments or notes you wish. This is an opportunity to forestall questions from the tax inspector by providing the answers at the same time as the return.
Include a note on anything unusual in the accounts, such as ‘repairs and renewals are higher than usual this year due to the factory needing repainting inside and out’, or ‘turnover on the hotel dropped this year as a result of the poor weather last summer’.
This does not guarantee that no questions will be asked, but it tilts the odds in your favour. It also offers some protection from enquiries arising after the normal ‘enquiry window’ – normally, HMRC have 12 months from the date you file your return to ask questions, but if they can show that your return did not make clear what was going on, this can be extended. This advice applies in particular to any situation where your return includes something that does not accord with HMRC’s view of how the tax legislation works – use the white space to explain what you have done, and why.
Don’t fall out with your staff – or your spouse or lover!
I am not joking – when I was a tax inspector, we received numerous tip-offs from employees with a grievance, or from angry spouses. One of the cases I am handling at the moment involves untrue allegations made by an ex-member of staff who walked out after a row with his manager, saying he would “cause you as much trouble as possible”.
Use a good accountant
If you submit your self-assessment yourself, and it contains something complex (such as a calculation of entrepreneurs’ relief in a complicated scenario, a very large capital gain, or anything involving shares in your employing company), there is a strong possibility that this aspect of the return will be the subject of an enquiry as HMRC may suspect that you are likely to have made a mistake. If your return has been submitted by a reputable firm of accountants, there is less chance of an error, and even if the accountant has got it wrong, provided you gave him all the facts and relied on his advice about the technicalities, there is a good chance you can show that you took ‘reasonable care’ over the return and thus avoid a penalty on any unpaid tax.
There is another reason for using an accountant:
Fee protection
This refers to a service offered by most good accountancy firms (don’t use a firm which does not offer it!). For a modest annual fee, they will guarantee not to charge for their time dealing with any enquiries from HMRC into returns they have filed on your behalf. Without this protection, the costs of dealing with even the simplest HMRC enquiry can easily spiral out of control, and I have seen too many cases where HMRC’s version of the tax due, though wrong, had to be accepted because it was too expensive to continue the argument.
Practical Tip:
There are ways to reduce the risks of being selected for an HMRC enquiry, but no way to remove all possibility, so use a good accountant and take out fee protection cover.
