The Inland Revenue’s (IR) crackdown on tax avoidance is bad news for all those who fill out self-assessment tax returns.
Every year, HM Revenue & Customs launches inquiries into around 250,000, or nearly 3%, of all self-assessment returns, says Lucy Warwick-Ching in the FT, and this year the total is likely to be much higher.
There’s an alleged £20bn-£30bn gap in the Exchequer’s accounts. In a recent speech, Dave Hartnett, its policy director, said it aims to shave £3.5bn a year off that figure by 2008, by making sure everyone pays what they’re supposed to. To show its resolve, the IR sent letters to people with funds in offshore tax havens, asking them why they held money offshore. Although 10% of such inquiries are random, such requests are “usually the trigger for most investigations”.
With the launch of self-assessment in 1996, the IR acquired powers to investigate any business without evidence. This might be what is known as an ‘aspect’ inquiry, which focuses on one or two parts of your return and is usually quick to resolve, or a ‘full’ inquiry, which could take years to resolve and may cost thousands of pounds in accountancy fees.
The most likely targets are those who are self-employed, wealthy and have complex tax arrangements. The IR can launch an inquiry on your 2003-2004 tax return until 31 January 2006, but if you filed after the deadline, it has a year from the date it received your form.
About 75% of inquiries into individuals are settled with no further tax to pay, but even in the best scenario, you still have to pay accountants’ costs to defend an investigation. For this reason, it is worth considering a form of insurance known as Professional Expenses Insurance or Protection, which is offered by the likes of JSA (01923-257200) and Abbey Legal Protection (0870-600 1480).
If you do find yourself in possession of an ominous letter from the IR, says David Mattin in The Sunday Times, you really must seek advice before doing anything. It is a potential minefield. While you’re not legally obliged to supply documents that are not strictly relevant and have no obligation to attend a meeting, according to Alan Pink, a tax consultant in Tunbridge Wells, you could be fined £60 a day for withholding relevant papers.
If an honest mistake has been made, which is often the case, a settlement will usually be reached, but if the IR feels you’re hiding information, it could well issue you with an estimate of what you owe and demand you pay it unless you can prove otherwise.
Of course, the best course of action is to avoid getting yourself into hot water in the first place. Angela Brooks Wong of Tax Relief, a firm that helps taxpayers to fight unfair IR claims, advises self-employed people to be scrupulous about record-keeping and make sure that they have seven years’ worth of records.