HMRC investigation? Let us help protect your interests
Tax Investigation Management
Tax investigations by HMRC often come as an unpleasant shock for many and can be very stressful.
From the outset communication from HMRC can be quite intimidating as they tend to take an aggressive position and “throw the book”. The enquiry will often embrace many aspects of the business and will typically take the form of a standard template letter padded out in parts by reference to the particular client.
In other cases HMRC will issue a letter which on the face of it looks benign but has far reaching implications if not handled correctly.
At Shipleys we are non-judgmental, vigorous in defending our clients and aim to resolve the investigation in the most efficient manner possible without compromising the quality of our work.
We have the experience and know-how to handle local district cases to large tax fraud cases both in direct and indirect tax (VAT).
And with Shipleys Tax Fee Protection Partner our clients have peace of mind that in the event of an enquiry all professional fees up to the First Tier Tribunal are covered.
Sections
- Areas
- First steps
- How we can help
- How do HMRC investigate a business?
- What are the trigger points to look out for?
Areas
Some of the areas in which we regularly assist clients are:
- Code of Practice 9
- Code of Practice 8
- Voluntary Disclosures to HMRC (Onshore)
- Compliance Checks
- Negotiated Settlements with HMRC
First steps
- You need to know what your rights are under enquiry
- Identify and prioritise of areas of primary concern
- Assemble and analyse relevant information and evidence in order to quantify the correct tax liability
- You need advice on what HMRC can ask you to produce – whether you have to provide copies of documents and soft copies of electronic files for example
- You need an assessment of your accounting systems to know if it is robust enough to withstand scrutiny
- You want to reduce the risk of an investigation going forward and improve compliance procedures.
How we can help
- Our team consists of highly experienced ex-HMRC Inspectors
- We can influence and control the pace of investigation
- Our specialist knowledge will be utilised to challenge any incorrect assumptions made by HMRC
- Comprehensive Fee Protection insurance for clients
Remember early intervention by a tax investigation specialist could resolve the dispute relatively quickly; what not do to is to attempt to correspond with the tax man yourself as you could unknowingly put the proverbial “foot in it”.
Are under enquiry? Do you think you are at risk of an investigation? Contact us now for independent advice on your options.
HOW DO HMRC INVESTIGATE A BUSINESS?
Some tax investigations are random but increasingly the majority are as a result of HMRC’s risk analyses/assessments.
This “risk assessment” process typically compares the results of the business to other similar businesses; it statistically analyse areas such as gross profit margin, mark-up rate and comparisons to earlier years. Where a case is “risk assessed” HMRC cannot decline the invitation to investigate.
Even where HMRC know that there was “nothing in it for them”, officers have openly admitted that they have no choice but to open an enquiry because the risk assessment process had identified the case as warranting an enquiry.
What are the trigger points to look out for?
The short answer is patterns and, to a certain extent, timing.
Timing
Most accountants are unaware that whilst HMRC can launch an investigation into a business at any time within the statutory timeframe, enquiry notices are usually timedto be issued at specific times of the year in order to control work flow. Favoured times for issuing enquiry notice are the end of January (accountants busy with heavy workloads) and Fridays (clients receive a shock when opening post on a weekend!).
Nowadays, HMRC typically impose a non-statutory time limit on the taxpayer for producing information requested in the opening letter. Often it will not be possible to provide this within the time frame specified, and it is advisable to make contact very quickly with HMRC if this is the case. This is important in both establishing a relationship with the officer dealing with the enquiry and also gaining maximum penalty mitigation for cooperation in the event there is culpability.
Patterns
HMRC expect to see consistency across a business, both within the business itself and also across similar sectors. It will expect turnover to be fairly level whilst accepting modest fluctuations in either direction. If turnover goes down it will expect expenses to decrease. If profit decreases HMRC will query if proprietors’ drawings/directors remuneration increases. This crude analysis tool is often misleading and belies the actual reasons for fluctuations leading to businesses that have nothing to hide being flagged up for enquiry.
For example, if turnover increases substantially HMRC may conclude that maybe not all of the turnover in the previous year was declared. Or if it drops significantly then maybe some has been taken by the owner and not declared? The reality maybe that turnover has increased due to having a exceptionally good year and decreased because of a loss of a large customer or order.
Suspicion is also aroused if the claim in respect of administration expenses increases well beyond what would be expected comparing it with the previous year. HMRC will wonder whether hours have increased (hence the increase in admin expenses) and therefore the officer will wonder why turnover has gone down.
Proprietors’ drawings – a substantial increase could mean that drawings may have been understated in the past, leading HMRC to query whether any cash takings have not been declared. Similarly, if the drawings are less than the salary paid to the highest paid employee HMRC will be very uneasy – business owners are expected to be the highest earners in the business even though the reality is most proprietors in business start ups do not take any drawings in the formative years.
Gross profit margins (GPR) – typically the GPR of the business will be examined over a period of up to 6 years to see whether or not it is consistent. It will also be compared to similar businesses and fluctuations of more than a few percent will arouse suspicion. HMRC has access to a vast database of information indicating what the GPR of a particular type of business should be.
Invoices – An officer will scrutinise invoices carefully to check whether part of the invoices are being paid in cash to disguise the true GPR.
Sectors – HMRC will often target a particular sector because it has become aware of consistent malpractice across the sector. For example, Medical practices, dentists and vets are targeted because they engage locums as self- employed workers whereas in reality it is difficult to show that a locum is self- employed in many typical practices.
Professional footballers and their clubs have been under scrutiny for a few years now mainly because in some cases a player will receive a payment for the exploitation of his “image rights” and HMRC does not approve of this because it reduces or in some cases completely avoids liability to UK tax by devising a structure which holds the image rights offshore.
Umbrella companies and IT agencies using “one-man band” IT companies have been under the microscope for a long time (see IR35), mainly because it is considered that many of them are purportedly engaged as self- employed workers but the reality is that they can be deemed to be employees.
Standard of living – does an individual have the means to finance his/her standard of living? Information will be gained in this regard from a variety of sources, giving HMRC details of property owned, cars, boats, bank accounts, horses etc. Although there will often be perfectly reasonable explanations as to how such assets may have been acquired it may not stop HMRC delving further.
People often think they can outwit HMRC and stay one step ahead. However, they should be well aware of that most of the tricks which the unscrupulous businessman may try has been seen and dealt with by HMRC many times over and they underestimate HMRC at their peril.
If you require help with tax or VAT investigations then speak to our experts on 0114 272 4984 or email info@shipleystax.com.
Latest news & blogs…
Getting The Right Advice: Top 5 Reasons Why It Matters
FOR MANY in the UK, the tax and accounting landscape is seen as overly complicated and ever-changing, making it vital to choose a tax adviser who can effectively navigate this terrain.
In todays’ Shipleys Tax blog we look at the Top Five Reasons why selecting the right tax adviser is crucial for your overall financial health.
Does paying more save more? Let’s find out.
1. Tax Optimisation: Maximise Tax Savings
The UK tax code is a labyrinth of potential savings, but only a proficient tax adviser can unlock these opportunities. They can identify hidden deductions, credits, and exemptions tailored to your financial situation. An inexperienced adviser, on the other hand, may overlook these nuances, resulting in unnecessarily high tax liabilities. For instance, failing to utilise even simple tax reliefs such as Entrepreneur’s Relief or R&D Tax Credits can significantly inflate your tax bill.
2. Asset Protection: Safeguarding Your Wealth
Whether it’s real estate, business assets, or investments like gold and cryptocurrencies, the right tax adviser can help investors protect their wealth. They can devise strategies to shield these assets from creditors, legal disputes, and unexpected personal circumstances. They understand UK-specific legal structures and practices, like the use of LLPs, trusts or limited companies, which can effectively safeguard your wealth. However, an adviser with less experience or understanding of the UK market might lack the in-depth knowledge of these asset protection strategies, potentially leaving your assets vulnerable to financial risks.
For landlords and overseas investors in the UK property market, strategising asset protection through effective tax planning is a critical part of investment management. A seasoned tax adviser can provide invaluable guidance on utilising the UK’s tax legislation to your advantage. They can help design strategies such as setting up tax efficient structures for buy-to-let or development properties or making optimal use of tax reliefs which reduce tax exposure to taxes such VAT, SDLT, CGT or ATED. These tax planning strategies can minimise your tax liabilities and shield your investments from undue exposure. On the other hand, less experienced advisers might not have the breadth of knowledge to leverage these tax benefits effectively, which could result in higher tax payments and potential erosion of your investment returns.
3. Staying Ahead in the Crypto Game: Cryptocurrency Taxation Expertise
The new frontier of cryptocurrencies brings with it complex tax implications. A savvy tax adviser stays abreast of these changes, enabling you to comply with the law while maximising the benefits of your crypto investments. In contrast, an inexperienced adviser might not fully understand the intricacies of cryptocurrency taxation, potentially leading to compliance issues or overpayment of taxes.
4. Enhancing Stakeholder Confidence
Your financial statements are more than just numbers; they’re a reflection of your financial health and business acumen. A top-tier tax adviser will ensure your accounts are accurate, transparent, and compliant, enhancing the confidence of stakeholders like banks, HMRC, and potential buyers. In contrast, financial statements prepared by less experienced advisers may raise questions about their accuracy and reliability, potentially impacting your relationships with these crucial stakeholders.
In contrast, financial statements prepared by less experienced advisers may raise questions about their accuracy and reliability, which can have significant implications. For instance, banks may become hesitant in extending credit or approving loans if they perceive inconsistencies or inaccuracies in your financial statements. HMRC might increase scrutiny on your tax filings, possibly triggering audits and investigations. Potential buyers or investors may question the viability of your business based on these financial statements, which could affect your business’s valuation and sale prospects. Even your business partners and employees might lose confidence in the management and financial stability of the business. In essence, less precise and trustworthy financial statements can ripple through all aspects of your business, potentially affecting your reputation, financial stability, and growth opportunities.
5. Long-term Wealth Management: Planning for the Future
Effective wealth management and retirement planning require foresight and expertise. The right tax adviser can guide you towards tax-efficient investment strategies that will maximise your wealth in the long run. On the other hand, an adviser with less experience may lack the insight to effectively manage your long-term wealth, which could impact your financial comfort in retirement.
In conclusion, the importance of choosing the right tax adviser cannot be overstated. Far too often, individuals and businesses fall into the trap of seeking advice only when a problem arises, missing out on valuable opportunities for proactive financial planning and strategy.
Some may opt for inexperienced or less qualified advisers in an attempt to save costs, overlooking the fact that expert advice is an investment in itself. Like any good investment, a competent adviser can generate a healthy return in the form of tax savings, improved financial management, increased stakeholder confidence, and secured long-term wealth.
Others may hesitate to invest in high-quality advice, failing to understand that the costs of inadequate or incorrect advice can far outweigh the fees of a top-tier adviser. The risks range from missed tax savings and audit risks to reduced stakeholder confidence and compromised asset protection.
If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.
Please note that Shipleys Tax do not give free advice by email or telephone.
A very happy Eid Mubarak to all
From the Shipleys Tax Team!
Eid ul Adha
Eid ul-Adha is the latter of the two Islamic holidays (the first being Eid ul Fitr) celebrated worldwide each year. It honours the willingness of Ibrahim (Abraham) to sacrifice his son Ismail (Ishmael) as an act of obedience to God’s command. At the point Ibrahim was to sacrifice his son, however, God provided a lamb to sacrifice instead.
Who Celebrates Eid ul-Adha in the UK?
With nearly 2.8 million Muslims living in the United Kingdom, which equals about 4.8% of the population, Islam constitutes the second largest religion in the country, after Christianity.
How is Eid ul-Adha celebrated in the UK?
On Eid ul-Adha, Muslims in the UK usually start the day by performing ghusl, a full-body purification ritual. They then dress in their finest outfits and attend a prayer service at an outdoor prayer ground or the local mosque. Afterward, it is customary to embrace and wish each other Eid Mubarak, which translates as “have a blessed Eid,” give gifts to children, and visit friends and relatives.
One of the central rituals on Eid al-Adha is “Qurbani”, the act of sacrificing a sheep, goat, or cow. The meat is then divided between family, friends, and the poor. Other Muslims give money to charity to give poorer families the chance to have a proper Eid feast.
Eid ul-Adha has a celebratory character, and the day may be rounded off by visiting funfairs or festivals held for the occasion in some British cities.
Eid ul-Adha Food
In contrast to Eid ul-Fitr, which is nicknamed the “Sweet Eid” for its variety of sweet dishes, Eid ul-Adha is often called the “Salty Eid” because the feast includes mainly savoury food.
Popular dishes include Kebab (boneless cooked meat), Haleem (a stew usually made from meat, wheat, and lentils), and Biryani (a spicy meat and rice dish originally from India). The meal is usually rounded off by a sweet dessert, featuring cakes, biscuits, or sweet pastries like Turkish baklava.
The Hajj – and its connection with Eid ul Adha
Muslims celebrate Eid ul-Adha on the last day of the Hajj. The Hajj is pilgrimage to Makkah in Saudi Arabia. It occurs every year and is the Fifth Pillar of Islam (and therefore very important).
All Muslims who are fit and able to travel should make the visit to Makkah at least once in their lives.
During the Hajj the pilgrims perform acts of worship and renew their faith and sense of purpose in the world.
This year it was reported around 2.5 million Muslims from all over the world visited Makkah for Hajj.
The Ka’bah
The Ka’bah (black cube) is the most important monument in Islam. Pilgrims walk around the Ka’bah seven times and many of them try to touch the Black Stone (deemed to be a stone from heaven) located at the corner. Contrary to popular belief, muslims do not worship the Ka’bah, nor does it actually house God, it is a symbol of faith and unity. The Kaba is the direction of their prayer, not the object of it. This misconception stems from the fact that Muslims are seen bowing and prostrating in front of the Kaba in pictures.
HMRC: School Fees Tax Planning under spotlight – A ticking time bomb?
IN A RECENT tax spotlight report, HM Revenue and Customs (HMRC) has highlighted a supposed school fees tax planning scheme that has gained popularity among owner managed companies. HMRC suggests in this report that the particular scheme, which aims to fund education fees through dividend diversion to their minor children, does not work as the arrangements are caught by specific anti-avoidance legislation (https://www.gov.uk/guidance/dividend-diversion-scheme-used-to-fund-education-fees-spotlight-62).
In today’s Shipleys Tax brief, we look at school fees tax planning in light of HMRC report above and ask: is there still room for sensible school fees planning?
HMRC suggests that the particular scheme, which aims to fund education fees through dividend diversion to their minor children, does not work…
In a nutshell
In the report HMRC explain the arrangement involves a company issuing a new class of shares, which are then bought by a relative of the company owner for a sum considerably below market value. These shares are gifted to a trust for the company owner’s children. The trust then receives substantial dividend payments, which are taxed at a much lower rate due to the children’s personal tax-free allowance, dividend allowances, and basic tax rate eligibility.
However, HMRC state that this scheme is ineffective as it contravenes specific anti-avoidance legislation covering similar arrangements aiming to provide certain tax advantages. HMRC has strongly advised anyone involved in such schemes to withdraw from them and settle their tax affairs.
Those who have implemented such schemes now face the daunting task of untangling their financial affairs, rectifying their tax compliance status, and potentially confronting substantial HMRC penalties. This scenario underlines the complexity and risks inherent in engaging with such tax avoidance strategies.
So, school fees planning is dead?
Not quite.
Legitimate tax planning, which encompasses school fee planning, is still very much a viable and acceptable practice. This holds true as long as the planning is carried out in a non-artificial or non-abusive manner. Like all forms of tax planning, school fee planning should be grounded in genuine financial activity.
Those who have implemented such schemes now face the daunting task of untangling their financial affairs, rectifying their tax compliance status, and potentially confronting substantial HMRC penalties.
It is essential to understand that while attempting to optimise tax liabilities is acceptable, artificial or abusive arrangements is where the problem begins. As long as there is a genuine financial activity underpinning these plans, and not just contrived setups designed solely for tax avoidance, they are likely to be accepted by HMRC.
Next Steps
If you are involved in any school fee tax scheme you should take immediate professional advice which may include:
- cease, desist and withdraw from making any further distributions to fund school fees
- settling tax affairs which make include making unprompted disclosures to HMRC as this should mitigate the penalty position
- unwinding any structures/trusts, however, one will need to be alive to the tax consequences of doing so
- updating the trust register with HMRC, if applicable.
Future of School Fees Planning
Could there be situations where affluent families, non-parent family members, or relatives can genuinely transfer income-producing assets without falling foul of the anti-avoidance rules?
In short, yes – but with conditions.
In cases where families or relatives genuinely aim to fund a child’s education (excluding parents of minor children), there are still sensible and legitimate strategies which can mitigate taxes whilst steering away from the contrived and artificial arrangements which may be caught.
Also, one should note that the gifting of assets can lead to tax liabilities, exposing the donor to capital gains tax and inheritance tax. As such, it is prudent to seek professional tax advice before entering any planning.
In cases where families or relatives genuinely aim to fund a child’s education (excluding parents of minor children), there are still sensible and legitimate strategies which can mitigate taxes…
Final Words
When done ethically and transparently, sensible school fee tax planning can be effective for those aiming to support a child’s education. However, it is imperative to steer clear of artificial arrangements which carry considerable financial repercussions.
Always consult with a reputable tax adviser before making any decisions about school fees tax planning.
At Shipleys Tax, our tax planning strategies are always designed to be sensible, practical and transparent, giving you peace of mind that your tax affairs are fully compliant with all relevant legislation.
If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.
Please note that Shipleys Tax do not give free advice by email or telephone.
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