Tax investigations can easily become highly complex projects with many pitfalls for those not used to managing them. At PKF, we are committed to supporting other professionals to minimise the risks and costs to themselves and their clients.
As no two cases are exactly the same, it is not possible to set out prescriptive rules on how to handle an investigation – there is no substitute for practical experience. Tax investigation specialists at PKF develop a bespoke strategy to use the particular circumstances of each case to the taxpayer’s advantage while taking into account the parameters of the relevant legislation and the respective rights, powers, and obligations of HMRC and the taxpayer. Our experience from a wide range of investigation casework has highlighted the important dos and don’ts illustrated in the following case studies.
To download a pdf version of our latest case studies please click here.
Presumed benefits in kind
A home-help / handyman who, together with his family, occupied a small part of a significant property attended a meeting with his accountant. The inspector asserted very strongly that he had an accommodation benefit in kind of over £200,000pa, leaving the taxpayer very distressed. On reviewing the case, we took issue with the inspector and were able to resolve matters for only a small PAYE adjustment in relation to his salary.
Message: Don’t attend meetings without appropriate representation.
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Proactive beats reactive
The inspector opened a full enquiry into an owner-managed company. The client’s accountant asked us to deal with the case. We agreed with the inspector that we would review the books and records, instead of HMRC doing so, and report back to him with our findings. We undertook a detailed forensic analysis of the relevant data, including electronic data mining using “PKF Finder”. As we did a proper professional job and the inspector had endorsed this approach, he could not then argue against our findings and an agreeable settlement was reached.
Message: Don’t work enquiry cases to a rigid formula - in the right circumstances it may be preferable to take control of the testing rather than react to HMRC’s findings and questions.
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HMRC strong-arm tactics
A self assessment enquiry was opened into a taxpayer who was invited to a meeting. He subsequently attended three meetings with HMRC at which he was unrepresented, even though he had a tax agent, resulting in demands for huge amounts of tax based entirely on those discussions and movements in his bank accounts. The meetings focussed on his business life generally, not just the year of enquiry, as did the proposed adjustments. At that late stage, we were asked to advise. It transpired that HMRC had significantly overstepped the mark and had “tried it on” with an unrepresented taxpayer, a point which we took advantage of to advance the case towards a far better settlement.
Message: Your clients don’t have to attend meetings with HMRC. Sometimes it is wise to do so, but never allow them to do so without proper representation.
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Quiet does not mean closed
A long running full enquiry into a company and its directors went very quiet. We were asked to review the papers and comment. We subsequently applied to the Commissioners for a closure notice and the case was closed without adjustment. It transpired that, in the quiet period, the inspector had been actively digging for further information from various sources.
Message: Don’t be complacent if it goes quiet. It may be that HMRC is understaffed but it is more likely that something is going on in the background.
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Unwilling client
A taxpayer was obstructive throughout the enquiry process. In particular, he refused to accept that anything was wrong (even though it clearly was), did not provide proper explanations to HMRC and provided invoices and other records on a piecemeal basis. HMRC wanted to charge a very high penalty indeed. We managed to reduce the penalty to 45% – still high, but low in view of the client’s lack of disclosure and cooperation, and far less than was originally sought.
Message: Cooperating with HMRC usually pays, but do help the client understand that this is not the same as capitulating.
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Care with meetings
A company’s tax adviser attended the opening meeting of a serious fraud investigation. He did not properly appreciate the seriousness of the case, the appropriate procedures to follow or any suitable strategy. The inspector was unhappy with the outcome and decided to consider prosecution – the taxpayer could and should have been protected from this. We were called in and persuaded the inspector not to prosecute. The inspector said at the time that he had increased confidence that matters would progress properly following well-known specialist advisers being appointed.
Message: Know your limits and when to ask for specialist advice.
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Where is the proof?
A businessman was under investigation for under-declarations of both VAT and direct tax. HMRC initially refused point blank to accept our calculations but we had confidence in them and refused to be moved in the absence of further evidence and made it clear we were prepared to go to the Special Commissioners. HMRC backed down.
Message: Be flexible but, when appropriate, stick to your guns.
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Get to the point
An accountant was accused by a former client of negligence in preparing tax returns for him and his business. We were asked to review the papers and provide an opinion, following which the case was dropped.
Message: Instructing an expert can help prevent difficult non fee-earning matters from dragging on indefinitely.
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Remittances
HMRC asserted that a wealthy individual of foreign origin but living in the UK had remitted huge amounts of income to the UK. We were asked by the client’s lawyer to look into the banking arrangements and remittances made. The issues were complex and leading counsel’s opinion was obtained, following which, detailed analyses and technical arguments were raised. After a lot of debate with HMRC, a settlement was agreed at a fraction of the amount originally suggested.
Message: Don’t try and do it all yourself. Recognise when outside expertise is required.
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Group attack
A football club was under investigation and had been asked various questions. In addition to the client, we liaised with players’ tax agents and it turned out that some players had been approached directly and asked similar questions, leading to the possibility of inconsistencies or loose, layman’s answers being given.
Message: Broaden your thinking to consider everything that the inspector might be doing to advance his case.
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Hard evidence
A businessman was in the process of a messy divorce. It transpired that he had received significant dividends before selling his company for several £m. No tax returns had ever been prepared. We were asked not only to sort out matters with HMRC but to act as an expert witness for the court in the divorce case, reporting on the likely liabilities. We secured that the Civil Investigation of Fraud (CIF) route could be undertaken by post and, after initial disagreement, reached a settlement under which no tax was due on the share sale and both our client and his former wife were significantly better off.
Message: Don’t be afraid to resist challenges to a CIF report - a lot of work and evidence gathering (including in this case witness statements obtained via both the husband’s and his former wife’s lawyers) will have gone into preparing that report.
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Disclosure avoids prosecution
A well known sportsman had received money for competing overseas, which was paid into an undisclosed Channel Islands bank account. The client’s private banker realised that action was needed and appointed us to sort the matter out. Prosecution was mooted but successfully avoided and the case proceeded under the CIF regime until an appropriate settlement was reached without the client’s misdemeanours becoming public.
Message: Do make sure that all aspects of the case are considered – there may be more at stake than just tax.
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Is HMRC’s model flawed?
A tax inspector had made a detailed calculation based on goods purchased by a Chinese restaurant in order to demonstrate that not all sales had been recorded as part of the business’s turnover. Significant additional tax, interest and penalties were sought. We were asked to advise the restaurant’s accountant. Using our experience and knowledge of similar cases, we delved deep into the inspector’s financial model and ascertained numerous flaws. We also advised on arguments to pose concerning the (adequate) standard of the taxpayer’s own records with the result that the inspector’s case was discredited and subsequently dropped.
Message: Don’t be afraid to challenge the inspector’s calculations, assertions and assumptions.
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Business or personal
A director of a small company and his accountant attended a meeting with HMRC at the start of a detailed self assessment enquiry into the company's return. He was asked in detail about his personal affairs, even though the enquiry was into the company – the inspector even demanded to see copies of a foreign relative's bank statements. The inspector also asserted that adverse conclusions would be drawn from failure to fully answer all of his questions. We were subsequently engaged and successfully restricted the scope of the enquiry into the company's affairs. After all the relevant questions had been resolved, the enquiry was closed without any adjustment to taxable profits.
Message: Be fully aware of the boundaries of the investigation and the client’s obligations.
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Offshore funds
An individual of moderate means had paid a significant redundancy cheque into an offshore bank account over 20 years ago. The account was kept as a nest egg for retirement under the mistaken belief that the interest was not taxable as it arose overseas. As retirement approached, the client consulted a financial adviser who identified the problem and approached us. The case was settled very quickly without any suggestion of deliberate wrongdoing.
Message: Involving experts helps to put things right quickly, reducing stress for you and your client.
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Pre-handle tough questions
An accountant’s client was under investigation for fraud. We reviewed and commented on correspondence and draft responses, provided guidance and ideas on reconstructing profit and asset figures from incomplete records and advised on strategy. We ensured that potential “banana skins” were brought to light and avoided. The strategy we developed resulted in an improved disclosure report to HMRC and a better eventual settlement for the client.
Message: Experience is vital to making sure timing and presentation are optimised.
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Research pays
An Indian restaurant proprietor was under investigation for suppressing turnover. Records covering many years previously were sparse. We recreated the figures by applying a combination of statistics on eating habits, the growth of Indian restaurants and patterns of credit card usage. The result was a much lower amount than HMRC’s estimates.
Message: Be imaginative when faced with an apparently impossible task of recreating turnover with few records.
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Unusual circumstances
The tax adviser to an individual, who was the subject of a full self assessment enquiry, asked us to take on the case from the beginning. We reviewed the records in detail before they were seen by the inspector and came up with a novel approach that was appropriate to the particular circumstances of the case. The enquiry was closed three days later with no tax adjustments.
Message: There is no model for dealing with a tax investigation - the particular circumstances of each case must be properly considered when developing a strategy.
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Regulatory Audit - suspicious documents sighted
A fairly routine regulatory audit by the former Inalnd Revenue (now HM Revenue & Customs) of a well-known financial services Plc led to an investigation by the Special Compliance Office (now known as Special Civil Investigations Office). Documents reviewed by the Revenue’s audit team appeared to give the impression that the files selected were of such poor quality that they had been significantly doctored, with various papers added or removed, before they had been passed to the Inspectors for review. The Revenue formed the view that perhaps the company was not properly complying with the various regulations to which it was subject but was trying to give the Inspectors the impression that it was.
A thorough two-year SCI investigation followed. PKF was engaged as a consultant to provide advice on strategy, to undertake the investigation work, and advise on the content and format of the subsequent detailed report. After two years the case was closed with no additional tax due and praise for the quality and thoroughness of the investigation which, according to the former Inland Revenue, “achieved the desired outcome of restoring the confidence of this Department in relation to both the specific issues and the wider picture”. The investigating officer expressed his thanks for the investigation work and report, saying: “your consistently constructive and co-operative approach(which) has in my opinion gone a long way to ensuring the successful resolution of this matter”.
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Detailed self assessment enquiry – questions outside the scope of the enquiry
The director of a small, family company attended an initial meeting with HMRC at the start of a detailed enquiry into the company’s self assessment return. Although a (non-specialist) accountant was present, it was apparent from the minutes of the meeting that the director had been quizzed on many issues outside the scope of the self-assessment enquiry. For example, he was asked about his own and his family’s personal affairs, even though the enquiry was into the company, rather than any individual. The Inspector even demanded to see copies of a relative’s bank statements – who had lived in the Middle East all her life.
PKF specialists were engaged to deal with the enquiry and successfully restricted the scope of the enquiry into the company’s affairs. After all the relevant questions had been resolved, the enquiry was closed without any adjustment to taxable profits.
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Special Civil Investigations office (SCI) - fraud investigation
A large restaurant business was suspected of not including cash receipts in its profit figures. After an exercise by Customs & Excise officers, this turned out to be true, and the case was referred to Special Compliance Office (now known as SCI)
PKF was asked to take on all the necessary investigation work and negotiate directly with the tax authorities. A full disclosure report, running to several volumes, was prepared. Despite this, SCI sought to tax double the amount of profits calculated. A great deal of work had been carried out to ensure the integrity of the figures in the report, including an analysis of data on the changing habits of people eating out and the level of credit card expenditure over the period in question. We therefore decided to stand firm and the SCO investigators eventually agreed to accept the significantly lower figures, as calculated by PKF.
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HM Revenue & Customs (HMRC") dispute - reducing the tax burden
HMRC petitioned for bankruptcy over a tax debt of £40,000, including a sum of £12,000 for tax and interest dating back 10 years.
PKF was asked to help and managed to convince HMRC that the true untaxed profits were much lower, reducing the debt to just £4,000. This included persuading HMRC to waive the legitimate 10-year old tax and interest of £12,000.
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Tax authority mistakes - recovering the costs
A company made several payments of corporation tax covering two accounting periods. Despite proper instructions, the collector of taxes allocated the payments incorrectly (including one amount to 1993), which resulted in various incorrect repayments and demands for additional tax and interest being made.
PKF were asked to resolve the problem and managed to successfully restore the position to what it should have been in the first place. This exercise, of course, incurred professional fees. However, on behalf of the client we successfully claimed the fees back from the Revenue, on the grounds that they were incurred because of its mistakes.
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Corporation tax investigation
A corporation tax investigation was opened into a multi-national group in the hotel and leisure sector. Just before the first meeting with the Revenue it was announced that a PAYE specialist investigator would also be present. The result was a thorough enquiry into the group’s corporation tax affairs and employee issues carried out at the same time.
Without the assistance of PKF liaising directly with the Revenue and persuading them to review a sample of companies rather than every single one in detail, senior staff at the client would have to give up a huge amount of time that should be spent on commercial duties. We were also able to give beneficial advice on technical issues as well as keeping the Revenue in check by ensuring that the investigations proceeded within the proper boundaries of the relevant legislation and guidelines.
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Employer compliance inspection
A local office of the Inland Revenue (now HM Revenue and Customs) decided to pay the hotel a visit, to carry out an employer compliance review. The standard questionnaire was used, core checks were undertaken and a few minor payroll issues were picked up. The officer was not familiar with the hotel and restaurant industry and appeared to accept that the existence of a tronc (didn’t understand them anyway) system meant that tips were dealt with correctly.
He did pick up one “hotel specific issue,” producing a computation for non-logo clothing purchased by the hotel. This was based on the full cost of all clothing purchased in one sample month, multiplied by 12 (months) and again by 6 (years). The amount was staggering!<p>The officer boasted that he had been on a training course and armed with this new knowledge asked for details of all payments made on termination of employment for the last 6 years. The hotel accountant wasn’t worried because she had taken advice about this previously and the contracts of employment were silent on the making of payments in lieu of notice. She readily admitted that the hotel often made payments in lieu of notice and told staff to leave immediately, if the work was below standard or for a number of other reasons. The officer jumped on this as giving rise to emoluments that were “normally” paid and subsequently sent computations of the income tax, NIC (employer and employee) and interest due. Penalties would also have to be considered.
The officer also told the accountant that the regular payments to M Fixit meant that he was an employee of the hotel, as was the Disc Jockey who did the weekly dances and the chauffeur. This resulted in another visit, this time accompanied by an employment status specialist. He told the accountant that the Hotel had failed to operate PAYE and, as a compromise, offered to ignore the additional tax, provided that the individuals registered as self-employed. However, for NIC he would want the hotel to immediately agree to pay the Class 1 NIC (employer and employees) said to be due.
The hotel accountant called in PKF and asked for our advice. To summarise what was eventually agreed:
- Clothing costs were analysed between kitchen whites, protective clothing, logo clothing and the taxable ordinary clothing. A settlement was agreed on the actual (and substantially lower) costs, but restricted to 20% as the “annual value” of the benefit provided to staff.
- We established that there was no contractual entitlement to payments in lieu of notice and that these were not “habitually” paid, therefore no liability arose.
- The Chauffeur had his own cars, although he was sometimes paid for driving the Hotel limousine, but he and the disc jockey were accepted as self-employed. We demonstrated that Fixit had his own business and other clients, but accepted that in recent years he had become a full-time maintenance man for the Hotel. An agreement was reached to operate PAYE from the following 6 April, allowing Fixit and his accountant to sort out his tax affairs.
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Disclaimer
The items listed above have been prepared as a general guide. They are not a substitute for professional advice, which would necessarily have to take account of the particular circumstances. The information and opinions given are liable to change without notice. Neither PKF (UK) LLP nor its partners or employees make any representation regarding the completeness or accuracy thereof and they accept no responsibility for any loss or damage incurred as a result of any user acting or refraining from acting upon anything contained in this newsletter or upon its omission therefrom.
PKF (UK) LLP is registered to carry out audit work by the Institute of Chartered Accountants in England and Wales. The principal place of business is Farringdon Place, 20 Farringdon Road, London, EC1M 3AP. Certain of the services described in this newsletter may be provided through PKF Financial Planning Limited. PKF Financial Planning Limited is authorised and regulated by the Financial Services Authority for investment business activities.
PKF (UK) LLP operates a code of conduct to ensure that all types of data are managed in a way which complies with the Data Protection Act 1998. If you do not wish to be informed about the services we offer and forthcoming events, please contact your local office. © PKF (UK) LLP 2008. All rights reserved.
For more information on any of the above issues please speak to your usual contact at PKF or e-mail us at taxinvestigations@uk.pkf.com
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