Really worried

[Reallyworried]

I run a joinery and building business with my husband, which we started in 2005. We have just had letters to say that they are going to do a 'check' (obviously an investigation.

Year on year we have increased our turnover, but expenses are quite high because of the way we run the business, which I will explain in a minute.

The turnover/profits we have had are:

2005/2006 - £17K TU - loss of £7K
2006/2007 - £77K TU £18K profit
2006/2007 - £192K TU £35K profit
2008/2009 - £290K TU £48K profit
2009/2010 - looks like £360K TU £55K profit

I can see that the turnover in relation to profit is high, which may have triggered the investigation?? I also made a mistake on VAT returns last year - I paid 17.5% VAT rather than 15% (I charged the customer correctly, it was just that I forgot to update one of the collumns on my spreadsheet - completely my error.

The reason the turnover is high (although I have nothing to compare it to?) is that when my husband is too busy, rather than turn away work, we will sub-contract out the labour, making sometimes just £100 or £200 profit (although sometimes a lot more profit) - the job may be a few thousand £'s though. Because I work for the business full time I have plenty of time to manage this. I also sell materials to customers directly, as we can make a small profit from this too, because we get such good discounts from builders merchants.

I obviously didnt think this through, as never considered having to explain this in an investigation (I know, niave) but now I am absolutely terrified that they wont believe me. I have done everything right (I think) but what if they say I have to pay more tax? if they think I have done something wrong???

I am so scared about what is going to happen. I struggle with stress and anxiety and am already feeling physically ill with worry - I havent eaten for 2 days.

I would appreciate any help or advice anyone can offer me.

[pawncob]

Firstly, you have done nothing wrong, so don't worry.
Secondly, you have reasonable explanations for the variation in sales/profit ratio. HMRC are not going to challenge your returns unless there is evidence of false accounting.
Read some of the threads on here on how to handle an investigation. If you have an accountant, use him as a barrier between you and HMRC.

[wamstax]

The first thing to do is to stop stressing. There may be reasons for an enquiry being started however if you are not aware of any material shortcomings in your operations or tax returns then clearly you could be worrying about nothing.

Before going any further you do of course want to ensure that they are making the checks within the statutory time limits etc so I assume that the letter relates to the year ended 5th April 2009 - or later or is made within (generally) 1 year and 3 months from the date that you submitted earlier years returns. Any doubts provide the date of the letter(s), the tax being enquired into, the return beign examined and the date the return was filed with HMRC.

Of course if you are aware that you have made mistakes - that havent already been corrected - then you would be best engaging the services of a tax adviser that is experienced in tax enquiry work so that your rights aren't prejudiced and HMRC don't do their normal and try to do fishing expeditions into your personal financial matters without establishing anythign materially wrong in relation to your business tax liabilities and record keeping.

You mention subcontractors and I assume that you have fully complied with the needs of the subcontractors legislation regarding retention of tax etc for uncertificated subbies etc.

[Reallyworried]

Thank you so much for replying.

I do all the CIS and everything is correct there, plus we have one employee and everything is correct there too (as far as I know anyhow)

I have been through everything yesterday and today with a fine tooth comb and there are one or two little errors, which I know I need to tell them. My accountant will get a very long email when he returns to work on Tuesday!

I know I need to stop stressing - my husband is trying to make me relax, but I always imagine the worst, and the last couple of days I have imaged us all being out on the street, having lost our home, the kids being taken into care and me and my husband in prison! (I know I am being irrational, just try telling my blood pressure that!)

I really appreciate your support - thank you.

[Reallyworried]

Sorry, yes the Investigation is for the one ending 5th April 2009.

[wamstax]

Ok so you have done all you can and you will just have to ensure that your accountant is up to dealing with HMRC enquiries.

Can I just say that on some occasions HMRC actually find nothing wrong and on others they can be working on a misunderstanding of the potential facts. So go into it with an open mind and don't be prepared to just accept whatever they say as being gospel as they can also be wrong - sometimes far too often.

If the matters that you need to bring to their attention are minor I would be guided by your accountant as to whether they are worthy of mentioning up front or just waiting and see if HMRC find anything material incorrect. Sometimes you can imagine that your simple mistakes are major items when in the overall they are nothing at all.

Get some sleep and await your accountants return for advice.

If he needs a second opinion or assistance on a normal professional fee basis please ask him to look at my company website at http://www.wamstaxltd.com

[mullet]

Some returns are selected for enquiry totally at random. Most are selected because of a perceived risk, which might (in your case) be something as innocuous as profitability not rising in proportion to turnover. All you need to do is explain how you run the business, and let the records back that up. Sound like you have nothing to worry about. They are well used to finding minor errors; they will tell you to put them right for the future and will talk to you about undepaid duty (if any). It's all pretty friendly. Make sure you have chocolate Hobnobs available if they come out to see you. Every little helps.

[Reallyworried]

Thanks again for the replies - it is very much appreciated as I feel very 'lonely' trying to deal with this. I dont want my husband to worry (which at the moment he isnt thank goodness) as he needs to keep a clear head to get on with his work!

I will speak to my Accountant on Tuesday (he very kindly allowed me to waffle on for an hour on Saturday on the phone!) - I have lots to ask him.

I know we are good people and do the right thing - I just have it at the back of my mind that Tax Inspectors are all to get you! (I used to know one ) after reading some of the posts on here I am dreading it if it takes 3 years!

[Reallyworried]

I am still working through all of this.

Having looked at my Accountants summary to me of my accounts, I have noticed that he has the following:

Sales £177K
Total Expenses £24,148

No mention of Sub-contractors, which actually account for over £56,000 - is there a space on the return for this figure to go on??? I am trying to get hold of my accountant to tell me whether he put that on, but if not, could this be where the problem is??

Sorry I keep going on, I have been up all night going through everything again in case I have missed anything - I have also read almost every thread in this forum and have scared myself silly that they are going to say that I have done something wrong and make me pay hundreds of thousands of £'s - my husband works so hard and our business is our life - I dont want to lose it....

[mullet]

have scared myself silly that they are going to say that I have done something wrong and make me pay hundreds of thousands of £'s

Stop worrying! It won't change anything.

No mention of Sub-contractors, which actually account for over £56,000 - is there a space on the return for this figure to go on??? I am trying to get hold of my accountant to tell me whether he put that on, but if not, could this be where the problem is??

Subbie costs should go in box 17 of the 2008-09 tax return. http://www.hmrc.gov.uk/forms/2009/sa103f.pdf
It's impossible to say whether this is the problem, just on the basis of these posts.