Recent publicity surrounding tax avoidance by Gary Barlow and two other members of the Take That band shows that HMRC can get tough. The misdemeanours are reported to be costing the band members around £20 million, following a prosecution.
Everyone dreads the tax man coming, because if HMRC find deliberate inaccuracies in your returns, the penalties can be severe. They can fine you up to 200% of the tax due, so it clearly isn’t wise to incur their interest.
Some errors are innocent, of course, and if they are satisfied that they were not intended, you won’t be fined, but just cautioned and required to pay your tax promptly with any interest due. Innocent errors, though, are not likely if you have the help of your outsourced bookkeepers.
What to Expect
HMRC has risk assessment and intelligence teams, which analyse company tax returns. If they decide to set up an enquiry, they will write to let you know within 12 months from the date your return was submitted. Their letter should tell you what they are enquiring about, what information they need by when – usually within 30 days. If you fail to supply information requested in the allotted timescale, the standard penalty is £300, plus £60 a day until compliance with the request.
After the initial letter, the way they proceed may vary according to the severity of what they suspect. You may not have done anything wrong, but something about your return is not clear to them. If they are not satisfied with your response, they could ask to see all your accounts and records. Sometimes an error may have recurred from earlier tax periods, which means that there will still be tax due from those years. Occasionally, they may find you have overpaid and issue a repayment, which would be a great relief.
On the other hand, during the enquiry, you may be asked to pay some extra tax on account. This will not be obligatory but it will reduce the amount of interest you have to add to any amounts they find are due. Interest will be charged from the day after the deadline for paying the tax. If it also relates to earlier periods, this can rack up to significant amounts.
Mitigating the Consequences
If any of this does happen, it’s advisable to cooperate by owning up to any mistakes you know about and helping the investigating officer to understand and quantify them. Then you could be rewarded with less heavy penalties.
Knowing your rights as a tax payer can help you decide if any of their questions are not appropriate, so that they could be challenged. Your outsourced bookkeepers may have experience of HMRC enquiries with other clients, and may be able to advise you. Or they may suggest you consult a tax accountant or legal tax expert.