Another Inland Revenue "leverage exercise"

Following recent actions by the Revenue to send out what has been described as 'fishing letters' hinting at vague errors on tax returns, Keith Preece from Qdos Consulting has summarised the recent series of such exercises.

Keith Preece of Qdos Consulting writes:

First there was the exercise aimed at self-employed people with an annual business turnover of less than £15,000. This consisted of the local tax offices writing to their taxpayers suggesting that there might be something wrong with their tax returns and inviting them to seek advice, with a view to putting things right.

It is reasonable to assume that this generated some additional revenue for the Exchequer, as it had been shown statistically that there was a substantially disproportionate number of businesses with an annual turnover of just below £15,000, which enabled the proprietors to submit tax returns with only "three-line accounts". Presumably a considerable number of taxpayers were ensuring that their turnover was kept below £15,000, by some "artificial" means.

Only last month we saw another exercise, aimed at the construction industry, with thousands of building contractors and subcontractors receiving Inland Revenue letters suggesting that their tax status might be in question.

This coincided with the introduction of a new Inland Revenue computer programme aimed at providing taxpayers with an automatic assessment of their tax status. This exercise also has potential for being a big money spinner for the Revenue.

A number of contractors can be expected to respond by accepting employer status voluntarily, adopting the PAYE procedures for deducting Income Tax and Employee's National Insurance Contributions from the payments to their workers, and subjecting themselves to payments of Employer's NIC.

For those contractors who do not submit voluntarily, there is the fear of a formal enquiry letter from the Revenue. We are aware that additional staff have been moved to status work from other tax jobs, in preparation for a new compliance initiative on Construction Industry status.

Now we have a new exercise aimed at self-employed taxpayers with an annual turnover of between £15,000 and £150,000. Thousands of letters have been issued to businesses in this category. An Inland Revenue spokesman is reported to have said: "We know from the results of our enquiries that there are some common errors made by many people and sometimes find that customers claim for expenses to which they are not entitled. By offering advice on these issues in the letters, we hope to help them to complete future returns accurately and with confidence".

We may be confident that in due course Inland Revenue staff will be bending over backwards to offer "advice" to any "customers" who do not voluntarily report an irregularity or ask for help. This advice might consist of examining the customer's business records, and possibly his or her private finances, with a fine-tooth comb, with a view to finding something wrong. Those who do not disclose irregularities and are subject to an enquiry that discovers "errors" can expect charges to interest and penalties.

The common errors that the Revenue has in mind are fairly easy to predict and I list some below.

• Failure to restrict expense claims for elements of private use by the proprietor or members of his or her family (e.g. private motoring), or simply claiming personal expenditure that is not business related.
  
• A shopkeeper failing to declare the personal consumption of stock.
  
• Claiming capital expenditure, such as the purchase of a computer or a car, as an expense rather than as a Capital Allowance.
  
• Unreasonably large, or factually incorrect, deductions for Use of Home as Office or Wife's Wages, which are favourite subjects for the Inspector's challenge.
  
• Round-sum estimates, arising because accurate records of expenditure have not been maintained. This raises an interesting point. For example, if you estimate your travelling expenses at £1500, you are more likely to be taken up for enquiry than if you estimate them at £1501 or £1499, because the Revenue's computerised risk-based selection process identifies all expense deductions that end in a zero. For the same reason, if the total expense is correctly and precisely £1500, you are still at more risk of being investigated than someone who keeps no records but puts in a claim for an odd amount. Of course, if you can justify your claim, estimated or not, you should be in the clear. However, the real answer to this problem is to keep full and accurate records of all business expenditure, so that if you are selected for an enquiry you can provide suitable evidence.

Any taxpayer who thinks his or her tax return might be incorrect, or who just does not know what expenses to claim, is advised to seek professional advice.

Keith Preece

Qdos Consulting