Tax Investigations - Can they be avoided?

Each year tax inspectors randomly pick thousands of small business people for investigation. The stress and cost of this anti-lottery has been likened to a death in the family, divorce and house move rolled into one.

In this article Noel Duffy looks at how the risk of selection can be minimised and how, if you are selected, the most painful effects can be mitigated.

Explain Unusual Occurrences
The white spaces on the return are there for explanations. If the return shows a large figure for capital introduced or drawings is unusually low, because perhaps, you have lived on your partner's earnings for that year - explain this on either the white space on the tax return or an accompanying letter.

Ensure Consistency from Year to Year
The Inspector will expect tax returns to be reasonably consistent from year to year.
Differences will make him curious.

Ensure Consistency with the Industry Average
Tax Inspectors have a range of tools at their disposal. Software to compare a company's return with typical returns for the industry helps to detect businesses showing suspiciously low earners or gross profit percentages not in line with industry averages.

Do Not Prepare Your Own Return
Unfortunately preparing your own tax return without assistance from an accountant can help to mark you out. Dealing with an accountant with a poor reputation can be equally damaging.

Ensure you are Insured
A recent Sunday Times article surveyed the typical cost of dealing with a tax investigation and found this to be between £2,000 and £10,000 but could cost as much as £100,000. Among the respondents, costs were high on the list of stress factors. Many firms of accountants, including this one, offer insurance against the cost of an accountancy fee incurred during an investigation.

They are doing their Job
You might not like it and if you are the subject of an investigation you almost certainly won't, but try and remember it is not personal. Forewarned is forearmed. The Inspectors have careers and want to succeed. They will use all the weapons at their disposal including your fear and ignorance. Bryan Regan, Mr. Duffy's partner believes the single best thing you can do is to insure yourself. You will then be able to delegate responsibility for negotiating with the Inspectors, to your accountant. He can decide on how much information to pass over, he will not be rocked by threatening behaviour and most of all, you, as the client, will not be fretting constantly about mounting costs.

Footnote
The cost of insurance is 11% plus VAT of annual fees, subject to a maximum of £300 plus VAT. If you wish to discuss this further please contact one of the partners.

The above advice is given in good faith. Individual circumstances differ, no action should be taken without regard to these personal circumstances. Accordingly, please consult your professional adviser. If you wish to talk to one of our partners or tax consultants, please do so. The first hour is free and without obligation.