Likelihood of extending tax investigation to other years

[stellad]

We are nearing settlement in a tax investigation for the year 2002/2003. There is a sizable amount of tax to pay due to previously undeclared income, plus penalties of course. Will this inevitably lead to full investigation into prior years? If so, will they automatically investigate following years also? Thanks in advance for any advice.

[wamstax]

You do not mention what is sizeable. You do not say in what way you are near settlement and whether figures for the "enquiry year" 2002/2003 have been agreed in principle or whether the Inspector has merely put proposals that havent yet been agreed as a principle or way forward. Basically it could be that the Inspector is trying to establish the principle for the current year and
(a)if that is successful and
(b) the understated income is >£2000 for the enquiry year then there would be a presumption in my mind that he would be looking at earlier and later years unless the additions for the year were one off (e.g. specific expenses that only arose in that year or was in respect of something like WIP/Stocks that would be an accumulation of previous years). If you want to chat about it look at my site www.wamstaxltd.com and then if still interested give me a call for cost effective consideration

[Bob Jones]

Whether the Inspector decides to go back into earlier yeras will depend upon quite a number of factors.

1 I assume that because this is concerning you you have an issue regarding earliers years - ie this wasn't a one off omission eg a Capital gain.

2 It can depend on the tax lost of the year under enquiry and whether going back will be cost effective.

3 HMRC Inspectors have targets of both numbers of cases and yield - there may be yield in your case but another case may have more yield and the Inspector my decide to take up the other case rather than go into earlier years on yours.

4 There have been a large number of early retirements at Inspector level in HMRC over the last few months - I being one. When a person retires another has to take over the work or part of it - as a result pressure of other cases may result in yours being closed down prematurely.

5 The bottom line is that if you are "nearing settlement" then you should have been told before now that HMRC would be going back into earlier years. If they spring this on you at the 11th hour you then have cause for complaint.

6 Finally you ask whether this will result in automatic investigations for later years - not automatic - HMRC have ever more sophisticated methods of selecting cases and something may crop up in a later that requires a question- or if your Gross Profit was low and ommissions have been identified HMRC will expect to see better GPR in the future. If the following years return is already in and the Inspector has found fault with the current year he may expect you to voluntarily consider amending the later return.

Bob Jones
Internet Taxation Ltd
bob@internet-taxation.co.uk

[ivorproblem]

revenue policy is usually that where there are adjustments to the assessable profit figure of say a few thousand from omitted sales and/or overclaimed expenses they they will look to consider earlier year adjustments. they wouldnt get involved in actually reviewing the accounts but rather suggest estimates to be added back for earlier years eg - if you have understated profits for 2003-2004 of 10000 then they could suggest as an example a 7000 adjustment for 2002-2003 and 4000 for 2001-2002 and 2000 for 2000-2001 . they would also consider `going forward` if later years are `out of date` for formal enquiry or amendment