Any accountant, and a distressingly large number of people in business, will have come across the following scenario. The dread enquiry notice from HMRC lands on a taxpayer’s doormat. Initially this can look fairly innocuous, because the letter implies that HMRC are going to look at a specific and finite number of aspects of the tax return or accounts, and if you can respond suitably to these, that will be the end of the story. The taxman will walk away satisfied.
Often, though, the way things develop is along quite different lines. Perhaps the taxman’s first move is to ask to see all of your bank statements. He then goes through any amounts credited to those statements, with a view to making sure that these have been properly disclosed as income in your tax return, if they are receipts, that is, which are in the nature of income. Your answers to some of these questions raise further questions, and you then answer these. The inspector comes back with further queries, some of which are inspired by what you told him in “round 2” of your answers, and some of which appear to be fairly randomly selected queries that he could, perhaps, have asked the first time round.
A Long Sentence
In fact, again and again in practice, we’ve seen this scenario of the apparently endlessly protracted Revenue investigation. Nothing you say, in your answers, actually leads anyone reasonable to suppose that there is anything wrong with your tax return. But the reality of the matter, as many of us strongly suspect, is that taxman is looking to justify his original enquiry, and he can’t do this unless he finds something wrong. So it becomes a bit of a tussle between the taxpayer (whose time would be much better given to earning the profits on which HMRC get their tax) and a self justifying, back covering civil service mentality. And make no mistake about it, this sort of ultimately fruitless exchange can go on for years. And years.
If you are the unlucky taxpayer in this sort of scenario, do you have to simply carry on answering the taxman’s questions ad infinitum or do you have any rights in the matter?
The Taxpayer Fights Back
A big thing was made of the “safeguards” and “balances” built into this enquiry system when it was first introduced, following self assessment. It’s true to say that the overall balance is tilted massively in favour of the Revenue, and this isn’t surprising, of course: the Revenue wrote the rules themselves. However, they couldn’t get away without any kind of safeguard or weapon being put in the hands of the taxpayer. So let’s have a look at what these are.
Dig in your Heels
Firstly, there has to be a presumption that anything the taxman asks is something that he reasonably needs the answer to, in order to be happy that your accounts and returns are correct. At an early stage of an enquiry, this leaves a very wide field of potential questions, because at an early stage the taxman knows nothing about your financial affairs except what you’ve put in the return and accounts. But as time goes on, it becomes less and less reasonable for the inspector to introduce new enquiries, that he could have asked earlier on. It’s not just that he could have asked the questions before, either. As you proceed through the enquiry and nothing arises as a result of his first rounds of questions which might suggest that you’ve got your tax wrong in any way, it becomes less and less justifiable for him to ask new questions. You’re clearly not the sort of person who gets your accounts and returns wrong, and in all reasonableness, he should get the picture on this after a few exchanges of correspondence.
What you always want to guard against, of course, is what accountants refer to as “fishing expeditions”. This is the situation where the taxman is getting increasingly desperate to find something, and throws more and more general and wide ranging questions at you: or perhaps (as often happens) looks to extend the range of his enquiry, effectively, to earlier periods.
When things start going backwards in time like this, including to periods which are beyond the four year assessing time limit for HMRC, is the time to dig your heels in good and hard. It’s amazing how often this happens in practice, in fact, but unreasonable behaviour by the taxman shouldn’t ever go unchallenged.
Stopping the Flow of Information
The way things are meant to work is as follows. HMRC are perfectly entitled, of course, to enquire into returns, and this is one of the main planks of the self assessment system. Similarly, if the taxpayer doesn’t play ball, and respond to his questions, the taxman has the ability to issue a formal “information notice” (this will refer to Schedule 36, Finance Act 2008, somewhere on it) with financial sanctions for non compliance. The taxpayer’s weapon here, where a Schedule 36 Notice is issued, is to appeal against it if its demands for information are unreasonable.
Whilst there’s no appeal against a requirement to send your basic accounting records to the taxman, Schedule 36 Notices tend to go a lot further than this, and if the information isn’t, in your view, “reasonably required” to check your tax position, you should consider putting in a formal appeal against the notice. We’ve even seen cases where the taxman has asked to see a person’s will – as if that can have any effect on whether his tax return is correct or not!
We should make it clear that we’re not suggesting appealing against information notices as a routine thing. In theory at least, you have to be willing to take your appeal to the tribunal for them to adjudicate. But after five or six rounds of questions, or after three or four years of pointless question and answer sessions, it’s got to be something that you seriously consider, as being much cheaper in the long run (if the tribunal agrees with you) than simply allowing the enquiry to go on forever.
The Quest for Closure
Another right given to the taxpayer, and one which is surprisingly rarely used in our experience, is the formal request to HMRC to bring the enquiry to an end. This request can be made at any time, in fact: and if the taxman refuses to close the enquiry, you can take that request to the tribunal. Again, this is really a safeguard for that situation we have started off by describing – where the taxman is just dragging the whole enquiry out endlessly and apparently pointlessly. The more this describes your situation, the stronger your chance of having the enquiry shut down, of course.
Sometimes, perhaps surprisingly, the Revenue will agree to close their enquiry very readily. This, though, is most often in a situation where they decide to amend your self assessment to increase the amount of tax massively. They are entitled to do this, and on closure of an enquiry this is very often the outcome. You then have the right of appeal against the increase to your self assessment, and it then becomes a matter for the formal appeal process, or continued correspondence with the taxman. Despite this, requesting closure to the enquiry can still be a very good idea, because it can bring matters to a head, and prevent the seemingly endless ramification of the enquiries into ever new areas.
Complaint Procedures
Thirdly in our list of weapons in the taxpayer’s hands, as well as appeals against information notices and requests for the closure of enquiries, its also open to the taxpayer, where he feels it justified, to make a formal complaint against the particular officer’s handling of the enquiry. At least nine times out of ten, of course, you can expect nothing but angry self justification on the part of the officer himself and his colleagues in the HMRC complaints department, but if you have specific cases where the taxman has acted unreasonably, this will strengthen your complaint and make it harder for the Revenue to sweep it under the carpet. Where HMRC are throwing their weight around in an unjustifiable fashion, then, we would also suggest strongly taking the matter to your MP. It’s very often the case, in this country, that our only effective protection against overweening the behaviour on the part of civil servants is to protest to our democratically elected representative. An MP worth his or her salt will not simply refer the matter back to someone high in HMRC – though even that can pay dividends where the behaviour of the lower orders within the Revenue has been unacceptable – but will try to see the thing from your point of view, and to bring some kind of satisfactory resolution. Of course they’ve got a lot to do running the country: but nobody forces anyone else to put themselves up for parliament!
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