The world of tax investigations has been quiet for a number of years dating back to the merger between HM Inspector of Taxes and Customs and Excise.
Much internal discussion has taken place within the newly formed HM Revenue and Customs, as to how investigation work should be approached in future and new powers have been granted to officers involved in income and corporation tax investigations which enable them to adopt a more direct and aggressive approach should they wish to do so.
The Treasury has recently announced that the “tax gap” ie the difference between tax collected and what should be collected, rose to £42bn in the year ended 5 April 2009. David Gauke, the exchequer secretary declared that “the tax gap is staggering and this government is committed to taking the necessary action to bring it down.”
It is at this point that alarm bells should start to ring. The “necessary action to bring it down” means only one thing – a significant increase in the level and intensity of tax investigations, and indeed the government has undertaken to spend £900m over the next 4 years to tackle tax avoidance and evasion with a target yield of £7bn per year by 2014-15.
Clearly the coalition government means business and a much tougher and more rigorous approach can be expected from HMRC with its officers placed under intense pressure to produce results within a short period of time.
So, how will this affect the construction industry and what can construction firms/workers do to protect themselves?
Construction has been a popular target of HMRC for many years, as can be seen from the current proposals to tackle perceived “false self employment” – not perceived false self employment across all trades, professions, etc but restricted only to the construction industry. It is therefore a decent bet that the industry will be seen as a potentially lucrative area by officers tasked with meeting the new targets of £7bn per annum.
The first indication of a tax enquiry may not necessarily be a letter – HMRC may telephone the taxpayer to request an “informal” meeting, and it has been known for HMRC to discourage the taxpayer from inviting his accountant to be present, preferring to deal with an unprepared taxpayer rather than an accountant who knows the ropes! HMRC will look for evidence of undeclared takings, and will often find this by undertaking a very detailed review of the business records together with a review of private expenditure, assets and lifestyle.
HMRC has access to a world wide information network and will often come to a meeting armed with information about UK and offshore bank accounts held, assets owned and money spent by the taxpayer which have never been notified to HMRC by the taxpayer.
HMRC will check the operation of the CIS to ensure that it has been done properly – we are aware of one case where this has recently been done and a tax demand has been made for £1.5m! Hopefully this can be reduced!
HMRC will check the status of self employed workers engaged by the taxpayer – HMRC has had significant success in the past in persuading taxpayers that workers should have been taxed as employees, creating huge tax and national insurance liabilities.
VAT will also be examined to ensure that the correct rates have been observed.
My advice to anyone facing a tax investigation is always:
- Do not speak or correspond with HMRC without involving your accountant – it is like going to war without any weapons!
- HMRC will not become a lifelong friend so don’t become complacent if he comes across as a nice guy – at the end of the day he has only one intention and that is to relieve you of some hard earned cash! You must not drop your guard!
Before any enquiry is commenced:
- Consider having a review undertaken of your operation of the CIS – this can save many times more than the modest cost involved.
- Have a review undertaken of the status of workers engaged as self employed. It is usually possible to make changes to working practices which will ensure that they will be genuinely self employed.
- Take out fee protection insurance. The insurer will then pay the accountancy fees incurred in defending you from HMRC attack. This means that your accountant can give you the best possible defence.
By taking precautions you can save a great deal of money and stress in the future.
For more detailed information contact Dave Williams or Richard Clutterbuck on 01803 320100.