2003-04 tax return being queried by HMIR

[JJKrista1]

Hi,

HMRC wrote to me last year querying certain elements of my tax return from 2003-04 and requesting more information.

I am in the midst of responding to a series of letters from a HMRC compliance officer who seems to have formed an opinion that some elements in the return do not qualify for a deduction.

I'd like to obtain some 'professional advice', but where should I look to obtain this? (I've always been PAYE so have very simple tax affairs) and what is the likely costs of doing so? (I cannot afford to pay significant sums.)

Also is it correct to assume the results of this investigation will have a bearing on other tax years. What is the likelehood that HMRC will seek to investigate at previous/subsequent tax years?

Even if HMRC do not do this, do I have any obligation to inform them of any such situations where it appears I've made a incorrect assumnption/entry in other tax return? If I do this, what is HMRC's response likely to be?

Thanks in advance for your assistance.

[claymore]

Why do you think the compliance officer has formed an opinion? Your return might have been selected at random, in which case the compliance officer is simply checking that what you have claimed is properly allowable.

Why is HMRC only now looking at your 2003-04 Return? Were you late in sending it in? Normally the "enquiry window" for 2003-04 would have closed on 31 January 2005.

What items do you think might be giving cause for concern? If you have claimed a deduction for something, are you sure that tax relief is due?

It is certainly the case that, if the enquiry concludes that you have claimed something for which tax relief is not due you will have to pay the additional tax, plus interest and possibly a penalty, which would normally be a percentage of the additional tax, depending on the conduct of the enquiry.

Penalties can be mitigated if you are open and up front - yes, tell the enquiry officer if you think you might have made incorrect returns. Importantly, do not delay in replying to enquiry letters - delays can be considered lack of cooperation and can reduce penalty abatements.

If the enquiry finds that you have claimed items for which tax relief is not due, the enquiry officer can check earlier years using powers of discovery to assess any additional liabilities for those years. He can go back six years, if necessary - in exceptional circumstances 20 years.

If your tax affairs are as simple as you say, you may not need professional advice. But, as you are in the Self Assessment system I suspect your tax affairs are a bit more complex than you suggest. Just because you pay tax on your earnings under PAYE does not mean that other aspects of your income are simple.

If you want professional help, the Yellow Pages is as good a place as any to start. Or you could seek a recommendation from friends. But make sure you choose someone who has appropriate professional qualifications.

[King_Maker]

"f you want professional help, the Yellow Pages is as good a place as any to start. Or you could seek a recommendation from friends. But make sure you choose someone who has appropriate professional qualifications."

Or you can use the "Find a Professional" option on the right hand side of the forum.

http://www.taxationweb.co.uk/directory/

[JJKrista1]

Many thanks to claymore and King_Maker for your responses.

Being honest, I have no idea why HMCR have selected me as I have always filled in my tax returns on-time. Thus, I assume I have just been selected at random...

My tax affairs are really simple... I have worked from home for many years, which seems to be the focus of their investigation and they want me to justify why I work from home. (Which seems strange.)

I have used the 'find a professional' link, but (either rightly or wrongly) assume the cost of these organisations listed would be uneconomical for me. (sledgehammer to crack a walnut.)

How likely is HMRC to want to investigate other returns if they do indeed find 'against me'? At what rate does HMIR calculate interest for repayment and what are the considerations for determining the amount of penalty due? Are these documented anywhere?

Sorry if I'm asking 'Newbie' questions, but once again thanks in advance for your help.

[King_Maker]

HMRC are most likely to look at other years, if errors have been found in your 2003-04 Tax Return.

The interest rate for Late Paid Tax varies - it is currently 6.5% p.a. (but has been between 5.5% and 7.5% over the past 5 years).

The amount of the penalty - which is a % of the underpaid tax - is down to your own negotiating skills. It is here that a good accountant might be able to save you more than his/her fee.

[claymore]

Now that you have said you are working from home, the reason for the enquiry is perhaps a little clearer. HMRC will want to verify that any claims you make for expenses incurred in using your home for work are properly allowable - for example, have you apportioned heating and lighting costs correctly, have you allowed for private use. He will want to check on any other claims that you've made.

HMRC will also want to know why you work from home. Does your employer provide an office?

It may be that any adjustments that result from the enquiry are minor. That won't stop HMRC from reopening earlier years if this has been a long-running situation. But if the total extra tax arising from the enquiry is fairly small (less than say £2,000-£2,500)you might not be charged a penalty. The important thing is to try to deal with this quickly - try to send the compliance officer positive signals.

As for professional fees, different firms charge different amounts so shop around. Ask for a quote first before appointing an agent. That way you can decide if the bill is acceptable to you. At a guess, I'd budget for around £200 to £300, depending on how long it takes to settle the enquiry and how much work the agent has to do.

[claymore]

My apologies - I forgot to include a reply to your question about penalties. The Revenue produces a booklet (IR160) that gives details of the things they take into account when considering penalties - ask them for a copy or view it on their website. http://www.hmrc.gov.uk/pdfs/ir160.pdf

Briefly, they look at three things - disclosure, co-operation and seriousness. The penalty starts at 100% of the additional tax and there are abatements for these three categories - up to 20% for disclosure (up to 30% if you 'come clean' before they find out about something), up to 40% for co-operation and up to 40% for seriousness.

In most cases the abatement will be 20% for disclosure. If the person under enquiry co-operates with the enquiry - that means early replies to letters, supplying everything that the enquiry officer asks for and, if nesessary making a payment on account as soon as it becomes clear that further tax might be due - they will normally get the full 40% abatement, or pretty close to it.

It is generally seriousness that gives rise to the penalty. It would be exceptional for anyone to get the full 40% abatement. You might expect an abatement of 25% to 30% here.

So, if you have 20% for disclosure, 40% for co-operation and 25% for seriousness, your total abatemetn is 85%. That would leave a penalty of 15% of the further tax. (In cases of evasion or fraud the penalties would be much higher, but most cases are regarded as the far less serious offence of neglect.)

[wamstax]

I realise that this may be past its sell by date but I need to elaborate a wee bit in relation to Claymore's comment regarding "disclosure". I would just add that - so that people don't get the wrong idea that 30% will be available generally for this - the 30% is only available if the taxpayer comes along before HMRC are making enquiries AND it can be truly said that there was no risk of the error coming to light without the taxpayers disclosure.