How to avoid a tax investigation by HMRC
As I have mentioned many times, Nick and I were subject to an HMRC tax investigation audit several years ago which lasted around 18 months.
The tax investigation was a very stressful experience, but we were supported by our accountant, who made the process much more bearable for us.
After 18 months of grilling and providing endless documentary evidence, nothing came of it, and it was closed with the acceptance that we had paid the correct amount of tax, but it was amazing how thorough the tax inspector was, even printing off pictures from our Facebook accounts!
We attended around five meetings over the course of the tax investigation, and had several very long phone calls, which was very time-consuming.
In one meeting, he asked how many vehicles we owned.
We said that we owned one car each and a motorhome, so that was a total of three.
He asked what these vehicles were and their number plates then asked again if we owned any other vehicles.
We said no, just the three. He said “I will ask you one last time … are you sure?”. We said we were.
He then produced a print out of a picture from Nick’s Facebook page, showing Nick sitting on Ferrari, with the caption – “Like my new car?!” and asked us where the Ferrari was.
We explained that this was a joke as it belonged to a friend of ours who brought it round to show us. We gave him the number plate and the friend’s name and he disappeared for a few minutes, and then came back saying that the line of enquiry was now closed.
At the end of the investigation, the inspector said they are trained to ask questions to trip people up and also trained to spot if people might be evading being truthful. They have a number of sophisticated techniques for catching people out.
A recent article in the Guardian and landlords seeking ways to avoid the impact of Section 24 has prompted me to write a few thoughts about why people get targeted for a tax investigation.
This information was given to me by the tax inspector who investigated us, so I regard it as credible.
He told us that no human eye ever looks at your tax return. They don’t have the resources to inspect each return individually.
What HMRC do have is a very sophisticated and powerful computer that is set with algorithms, parameters, and “ranges”, and if your tax return has any strange anomalies, such as one year declaring rental income, and then suddenly not, without CGT computation, the computer will flag this up and direct your tax return to a human to look at the discrepancy.
HMRC’s powerful “Connect” system also now draws on information from myriad government and corporate sources to create a profile of each taxpayer’s total income. Where this varies from the information provided by the taxpayer, the account is flagged and could be subject to further investigation.
So to avoid being flagged up for a tax inspection, my advice is:
1. File your SA accounts on time.
2. Use a professional accountant to make sure they are submitted correctly and that you claim all the expenses you are entitled to.
3. Do not try and “game” the system, because you stand a strong chance of being caught out. Make sure that any changes in your circumstances, such as reduced rental income, can be explained and evidenced.
4. Play it all with a straight bat. The penalties for tax evasion are very significant and HMRC have far reaching powers to fine evaders. It can be 100% penalty of the tax owed, if they find you have under-declared your tax liability.
5. Get professional advice from independent specialist tax advisors, not people selling schemes or ways to avoid tax. If something sounds very complex, or you can’t get clear answers to questions, or you are given generic replies, then be sure to get an independent opinion.
6. Put information in the supplementary pages of your return, if you have unusual data. Tell HMRC exactly what has happened, and why. As I mentioned above, HMRC are looking for things that don’t look like the norm, if you explain, they are less likely to take action.
7. Be careful and accurate what information you share on the social web, as HMRC obviously cross-reference it. For instance, if you claim you made £100K profit from a property transaction on social media, but that is not declared on your tax return, then you might have a hard job explaining that to a tax inspector.
On average, a full HMRC investigation lasts 16 months, but it can drag on for years, says Dave Stallon, commercial director at the Federation of Small Businesses (FSB).
“This inevitably affects the business, with firms taking time away from running their business to go back through historical records, collate and provide information to HMRC, and answer investigators’ questions.”
You can take out insurance against being audited and it typically costs around £150.00.
Remember, landlords are being regarded as an easy target, and with the continuation of the “Let Property” campaign and S24 kicking in, the HMRC property task force will have landlords on their radar.
Worth saying again, the penalties for tax evasion are very severe and HMRC have far-reaching powers.
Please note: I am not an accountant or qualified tax advisor, I am just sharing what I know from my own experiences. There will be people reading this better qualified than myself, and I hope they will add their thoughts.