Just a simple letter from HM Revenue and Customs is enough to put the fear of God into many people and it’s often enough to make the recipient feel guilty even when they’ve done nothing wrong. But when a letter arrives, it is incredibly important to open and take notice of it because you ignore it at your peril. Here then, is a simple guide as to what to do should you receive a notice about an investigation into your affairs.
Q: I have received a letter from the Inland Revenue asking me for more information on my business tax return and offering me a ‘Hansard’ Interview. What should I do?
A: Write back and acknowledge the letter and say you are seeking professional advice. You should not see or speak to the Revenue Officer without competent advice.
Q: What is the ‘Hansard’ Procedure?
A: Broadly it is an Inland Revenue procedure which gives you the opportunity to ‘come clean’ if you have concealed any income or gains or to confirm that you have nothing to hide. It may be that a genuine mistake has been made on your company or personal tax return and the procedure provides the opportunity to rectify this.
Q: I haven’t got anything to hide. Why don’t I just write back and tell them this and say I am not going to co-operate and they can fully investigate me if they wish.
A: This may be a perfectly reasonable position to adopt. However, remember that an investigation can take several years and it may just be quicker and easier in the long run to clear up any particular matters at the outset by co-operating with the Revenue.
Q: Can I tell the Inland Revenue I will co-operate with the Hansard Procedure and ask them to tell me what information they have and which areas of my tax affairs they are looking into?
A: No. The Inland Revenue will not give you any information. They want you to prepare a report about either all of your affairs or any area you think may be problematic.
Q: So I could be volunteering more information about my tax affairs than they already have?
A: Yes. This is where you need professional advice to assess the risks.
Q: How do the Inland Revenue get information about me?
A: It depends on your business, but disgruntled ex-employees or former business associates are often in a good position to provide such information. They may have documentation in their possession. In cash businesses the Revenue may rely on sample purchases and observation. They also use ratios to see if for instance alcohol consumption in a restaurant is very high which may indicate that takings in respect of food are being suppressed. Your lifestyle, especially if it receives press coverage, can trigger a review of your affairs. Only a small percentage of enquiries are random.
Q: If I agree to be interviewed by the Inland Revenue how should I prepare?
A: Preparation is the key. Think where the meeting will take place. The Inland Revenue will be keen to have the meeting at your premises. This is normally a bad move. You need to review your tax returns in advance, preferably with a professional adviser. You need to think about areas in which you may be vulnerable and have a strategy to deal with this.
Q: What questions will I be asked?
A: You will be asked to answer either `Yes’ or `No’ to the following questions with regard to any business with which you have been connected either as a director, partner or sole proprietor:
Have any transactions, receipts or expenses been omitted from or incorrectly recorded in the books?
Are the accounts sent to the Inland Revenue correct and complete to the best of your knowledge and belief?
Are all the company tax returns correct and complete to the best of your knowledge and belief?
Are all your personal tax returns correct and complete to the best of your knowledge and belief?
Are you prepared to allow an examination of all business books, business and private bank accounts and other business and private records in order that the Revenue may be satisfied that the answers to the previous questions are correct?
You will also be asked other questions more specific to your business, record keeping and your personal tax affairs.
Q: Does my husband/wife need to be present?
A: No. It may be a good idea for them not to be present. However, in some cases they may also be under investigation by the Revenue and it may be preferable from your point of view if you are interviewed together.
Q: Can the Inland Revenue ask me to give them mandates to approach my banks for Information?
A: Yes. Although sometimes it is more appropriate to agree to provide these either with your disclosure report or afterwards if the Revenue still require them. You should also bear in mind that as well as bank statements the Revenue may also ask your bank to provide copies of any notes of meetings held with you and other matters held on the bank’s file.
Q: What generally happens at the interview?
A: You will be cautioned. You will be given a copy of the Inland Revenue’s Code of Practice in this area. The interview is tape-recorded by the Revenue. The five standard questions above will be asked and the Revenue are likely to ask you to sign bank mandates. You will be asked if you want to admit to any irregularities and if so, to give details and the likely amounts involved. They normally ask you to produce a report even if you have made no admissions in order to clarify the source of your funds and explain your change in net wealth over a period of time.
Q: What sort of report will I have to prepare?
A: The Inland Revenue will expect the report to include the following as a minimum:
All privately operated bank and building society accounts covering the period under review with an explanation of any large transactions.
The costs of all substantial private assets to be reconciled with known resources.
The destination of the proceeds of the sale of substantial private assets to be reconciled with the private finances.
Either a single entry capital statement backed up by the bank and building society analysis noted above or a double entry capital statement covering your private finances for the period under review.
An estimated cash account for the period.
A detailed review of the accountant’s working papers for the period highlighting any readjustments to journals and the tax effect of the same.
A review of business books and records.
A narrative giving details of the background to the business, its growth, special factors affecting it and the circumstances in which the irregularities occurred.
A statement of the additional income to be assessed for each year.
Q: What period of time does the report have to cover?
A: The Inland Revenue will not tell you this. They will expect you to begin at the date you consider appropriate. You should bear in mind that the idea of the report is that you give full disclosure for the relevant period.
Q: What will happen if I do not give full disclosure in the report?
A: It is very important that you ensure the report is factually correct, gives full disclosure and presents a true reflection of your business and personal tax affairs. If you knowingly make a false disclosure in the report you may well be prosecuted and could be looking at a custodial sentence.
Reading through this article will illustrate that there are several lessons to be noted. Firstly, do not say or write anything in haste because you may get to regret it at leisure. Secondly, consider taking good accounting or legal advice before answering anything that HMRC put to you. Finally, be honest in your answers - lying will be found out and will not help you at all.
Ben Hopps is head of litigation & dispute resolution at Sykes Anderson LLP.
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