Tax return amendment investigation

[davidnhouse]

In December 2010 I was advised of a 12a enquiry for tax year 2008/09 for the partnership run by myself and my wife. For reasons which are not relevant the Revenue messed up the paperwork and after 9 months or so said the enquiry was invalid and withdrew it. By then the Revenue were time barred from re-opening the enquiry. They have agreed to pay for the wasted time of my accountant, but not at the rates he charges me, nor for the time he spent. I will get back only about 1/3rd of what it cost for something which was aborted. The 2009/10 return was filed on times and the tax paid. In April 2010, during the time of the work on the aborted enquiry, we filed an amendment to the 2009/10 return. This was well within the 12 months allowed for such a correction. It was not "discovered", it was simply amended, and the tax due paid.

Now the Revenue have announced another enquiry, this time into the amended part of the 2009/10 return. However they are also demanding information, statements of all bank and other deposit accounts, and financial records for 2008/09 and previous years to verify that the "underdeclaration" did not repeat in previous years. From my viewpoint there has not been an "underdeclaration", there has been an amendment which was carried out in a timely manner. Of course the Revenue can enquire into 2009/10 if they wish to and, should they now find an "underdeclaration" be entitled to seek assurances on previous years. I am confident they won't and that everything will be just as it should be, given the possibility of an odd accounting error here or there. We double checked everything before making the amendment.

Is the Revenue entitled, in these circumstances, to go fishing into the earlier years? Or, as I believe, must they limit themselves to the 2009/10 investigation only? If the latter is true what do you think I should do about it?

This matter is complicated by the fact that the business was sold last year and I no longer have any access to some of the records, which reside 250 miles away from where I plan to live. The home we have bought is being renovated and all our possessions, including all the old business records, are in store, probably until August or September. I have retired and have cancer. I am also on the other side of the world until May. In the meantime I have a 6 page letter from the Revenue asking me for unbelievable detail on the silliest of questions. It is all a bit of a pain!

[mullet]

The basic principle is "presumption of coninuity", based on a decided tax case. If HMRC establish that 2009-10 taxable income was understated, then the underlying reasons may lead them to believe that the same situation prevailed in the earlier years. THAT would be the discovery, on the basis of the Inspector having reason to believe that earlier years' self assessments were or had become insufficient.

HMRC are being a bit cheeky asking for records relating to the earlier years - they should be looking only at 2009-10 at first, but may then go back to earlier years if they "discover" under Section 29 TMA 1970. So at what stage is the enquiry? And why did you have to file an amended return? Was there a material increase in income? Do you (or they) think that you have been careless?

[AvocadoK]

There is some doubt over whether the continuity principle (Jonas v Bamford) looks backwards as well as forwards. The Tribunal case of Syed indicates that it only looks forward. It's only a first tier tribunal decision, but it is a start.

There may well be scope to challenge the HMRC request for documents. If they are asking for personal records as well as business, they should be referred to their own guidance on this matter which specifically tells them NOT to do this in the initial letter.

The key here is distinguishing what HMRC are entitled to and what they are not, and to resist any request for documents that they are not entitled to.

AK

[wamstax]

The problem here is that you are between two camps. Clearly if the HMRC paperwork had been sound your "belated" amendment made during the enquiry would not have been actioned until the closure of the enquiry. This is clearly legislated for and the amendment would have been taken into account as an adjustment arising from the enquiry. You say "for reasons that are not relevant" but surely all facts and reasons are relevant when you are seeking to justify that HMRC are not entitled to pursue matters by way of enquiry and the manner in which matters developed might be very relevant indeed. In fact if matters were so clear cut then the compensation being paid would have to have been for whatever was justified as wasted expenses and invoiced and paid by you as a result of their compensatable actions.

Anyway it was inevitable that if the initial paperwork was deficient then HMRC would not have been able to correct the opening paperwork given the proximity of the cut-off date for enquiry on a timeously submitted tax return. Equally however your adviser must have realised that the submission of an amended return would point to matters not having been previously correctly dealt with and that HMRC would have the automatic right to enquire into the matter(s) which were the subject of the amendment. Now of course you do not identify in what area your original partnership return was deficient. However if (and of course it is a big IF) the errors were so fundamental to the whole record keeping and business operations and profits of the partnership it might be obvious that not only was HMRC entitled to enquire into the whole P&L etc for the year (via the enquiry into the amendment) but the nature of the change made to the enquiry year in the amendment may be such that it was "almost" inevitable that you had been a bad boy (leavign your wife out of it for the moment) in past years.

Additionally the nature of the adjustment made in the amendment could be of such a nature that it was open and shut that adjustments required to be made for earlier periods which might lead to "discovery" type enquiries into earlier periods. They do not of course need to show their whole hand so as long as they can justify their requests as reasonable then they could go formal for the information requested. You do not say - but remember that if HMRC have information that shows that your personal return is deficient then it is dangerous to be playing fancy footwork just because they fouled it up originally.

[wamstax]

As previously said by Avo consider carefully what HMRC are entitled to before agreeing to or refusing requests for information business or private. Perhaps you will understand that if things were said during the lead up to hMRC withdrawing their enquiry - but after the cut-off date for enquiry on the original return then you may well have given them ammunition for discovery into this year or even earlier years.

You could of course get a taxpayer notice where HMRC had a reason to suspect see link http://www.hmrc.gov.uk/manuals/chmanual/CH23560.htm and you would need to consider not only whether the immediate requests are reasonable (or fishing) and what the alternatives open to HMRC would be if you "cut up rough".

While there were aggravating circumstances in the case of Rosette Franks (King Street) Limited v Dick 36TC100 HMRC probably prefer to use that case for the doctrine of continuity as they argue that that case gave the doctrine of continuity as regards the accounts for the year and all "surrounding" accounts beign unreliable

[wamstax]

Of course if the error was an isolated or one off type of adjustment then you could clearly contend that there was no doctrine of continuity and that any requests were potentially prejudicial, prejudged the outcome and were unreasonable. Of course both sides digging in their heels could lead to a tribunal appearance and attached costs

[davidnhouse]

Thanks to each for your comments and advice.

The reason that HMRC mucked up the paperwork was that they failed to advise me of the enquiry into 08/9. I was abroad at the time and did not see my post until 3 months after they announced it. My accountant did receive it correctly and advised me by email. We then did a lot of work on it via email and telephone and I found some revenue which had not been declared. As the period this was received bridged both 08/9 and 09/10 we made an admission of an underdeclaration for 08/9 and an amendment to 09/10, and accepted that there would be a penalty and interest for 08/9. It was only after this had all been done, and I had returned to the UK, that we found no letter to me. On checking we discovered it had been sent to an address which has no connection whtsoever to me. My accountant mentioned this to HMRC in a phone call, not necessarily intending to ask for a withdrawal, but more to try to put some credit in our goodwill bank. They immediately registered a complaint and withdrew the enquiry. 6 months later they offered a small amount of compensation, then 9 months later a new enquiry into the amended figure for 09/10.

However they continue to refer to an "underdeclaration". In their last (second) letter there is this:- I shall need to be satisfied that there were no similar understatements in any years either prior to, or following the 2008-09 and 2009-10 years and I would therefore invite Mr......... to provide me with any information and supporting documentary informationwhich might help clarify the situation". There was no "underdeclaration" in 09/10. There was an amendment. There was in 08/9 but this was voluntararily admitted, because their enquiry was withdrawn.

Given all of this, and in view of AvocadoK's comments (thanks) do you believe that HMRC are entitled to expect me to provide comprehensive personal and private information? Getting hold of the business records would be a nuisance, and would have to be delayed, but can be done. Some of these records were sketchy at best and are now not available, because of the business being sold. What I do have are buried deep in a store and won't be seen for at least 6 to 9 months from now, without considerable effort and expense and, if done, would not assist at all. The same applies to my private records. I did not keep everything anyway and cannot now even remember exactly what accounts were then current.

In view of my health situation, and the potential expense, I really don't want to have a major fight with HMRC. Anything they demand is going to cause me a lot of work. I have already requested that my bank provides copy statements for my major private account for every year back to 07/8 but, of course, they wont supply by email, are not available online so must be posted to my UK address. They will then move on to my accountant who will need to scan every page and email to me. Fortunately my accountant already holds copies of the business account but this private account was quite busy too, and of course my wife has one and we have other accounts too. The bank charges £10 per statement!

Any more thoughts about whether you think HMRC are really fishing, or whether they are justified and what my response could possibly be, are very welcome.

[wamstax]

Hi there
Few things that you might want to consider
(a) It is not unknown for HMRC staff to review these pages
(b) Bank statements can only cost £10 per institution if you make a Data Protection Act request (given the exhorbitant charges you seem to be getting charged)
(c) You have a professional adviser already acting
(d) You did in fact make a voluntary disclosure and HMRC would be justified in making all "reasonable" enquiries to ensure that your disclosure was complete and correct
(e) Lastly they clearly would have "discovery" as far as 2008-09 was concerned
(f) Just that extra bit of information (that was not on the table before) makes an awful lot of difference

If of course your accountant was seeking assistance then there are numerous professionals (on this site and others) that would be able to assist (either up front or in the background) on a proper client/adviser relationship

[davidnhouse]

Hi wamstax

Thanks for the additional comments.

a) I had wondered whether HMRC staff might read this forum too but took the decision that anything I was going to say would either be known to them already ,or be something I would be happy for them to know, given it is all the truth and is expressed in, hopefully, plain language. I considered using a "nom de plume" but decided that might make me look devious.
b) Thanks for that advice. I will so advise the bank, who are being particularly slow and thick over this. All they have sent so far are copy tax certificates.
c) Yes I do have an adviser, who is my regular accountant. He is properly qualified and has handled enquiries before, but is not a specialist. He himself says he might need help at some time.
d) The key word there is the magic one "reasonable".
e) OK, that is helpful to know.

Right now everything is on hold whilst my accountant handles the routine pre 31/1/2012 last minute return filings for other clients. However, we have already provided lots of detail, by way of spreadsheets which show every last debit and credit for the business. We have also explained how the understatement occurred, and how it can be verified, which once the relevant bank statements are to hand, will be obvious. I think HMRC already have almost all they need and their letter could have been reduced to one line, "please send the missing statements". Instead we have one 6 pages long with questions which don't make a lot of sense. My accountant also conducted a thorough check of the primary records of the business against the accounting records to verify they matched. In effect an audit. This covered several years, both the one under enquiry at the time, 08/9, and the subsequent and preceding ones. The business was run under management and is now sold. Due to it's nature most of those primary records transferred with the business and are no longer available to me, although I do believe my accountant retained. some of them.

[wamstax]

It might be worthwhile for your accountant to offer sight of his "audit" papers as regards the year before and after to HMRC by way of some comfort that the "irregularity" would not have been present before or after. Just a thought before they go down a formal request for reasonable information that you might disagree as being reasonable. Equally if your accountant was ever in need of one to one specific advice or second opinion I would be pleased to discuss terms which he might find surprisingly good value