In a tax investigation, what is “Telling”?
The HMRC factsheet, Penalties for inaccuracies in returns and documents, is issued when HMRC believes a penalty is likely to be due. The document is full of crucial information most of which is buried in the text. The ebook Penalties for inaccuracies in returns and documents DECODED is an analysis of the HMRC document; digging up true meanings and telling you what you need to know.
There are three voices; the voice of HMRC is in green, the voice of the person being investigated is in blue and the voice of the expert is in black.
What you can do to reduce any penalty we may charge
We can reduce the amount of any penalty we charge depending on our view of how much assistance you gave us. We refer to this assistance as the ‘quality of disclosure’ or as ‘telling, helping and giving’.
I don’t like the sound of this, telling, helping and giving, what’s this all about?
HMRC have got this big stick with “Penalties” written on it, and they are going to hit you with it unless you do everything they ask – that’s what they are saying, but all is not quite as it seems to be.
Examples of telling, helping and giving include:
Agreeing that there is something wrong and telling us how and why it happened.
Telling us everything you can about the extent of what is wrong as soon as you know about it.
What! But I haven’t done anything wrong! What’s all this about agreeing and telling?
By the time you read this factsheet HMRC will have performed a ‘risk analysis’ on you and decided you are a high risk, then they will have decided that there is a probability of penalties being due. So at this point there is an assumption of guilt.
What about answering HMRCs questions in full – that sounds ominous. What is “in full” and “within reason” anyway?
You have to cooperate with HMRC and give them the information they reasonably require to check your tax position. Their idea of what is reasonable and yours may well be dramatically different. If HMRC ask any questions that you feel fall outside the investigation you can challenge them saying that they don’t need that information to reasonably check your tax position. If they ask questions you cannot reasonably give an accurate answer to, then you can refuse or offer them an alternative. The important thing is to show that you are cooperating.
HMRC may want you to attend a meeting if, after their review, information indicates there is a significant problem. You are within your rights to decline this meeting but you should offer to give them – in writing – information they need to complete the investigation. You should avoid meetings unless you are clear on the issues and how you will handle them. If you’re not sure ask the officer to put their queries in writing so that you have time to give the points proper consideration. The same goes for phone calls. It is never a good idea to mislead the taxman whether deliberately or by being careless.
HMRC may want to build up a detailed picture of your outgoings if it appears your income appears insufficient to cover your apparent or likely life-style. To this end they ask ‘lifestyle questions’ which may take the form of a questionnaire. So it’s questions like; how many times do you go to the pub? What do you drink? How many take-out meals do you have a week?
Lifestyle questionnaires produce notoriously inaccurate results. Let’s say you go to the pub twice a week and each time you drink three pints and buy a friend a dry white wine. HMRC will tot this up to be £16 (cost of drinks) x 2 (because it’s twice a week) = £32 x 52 (the number of weeks in a year) = £1,664.
Once you’ve answered five pages of questions like that they simply say, “We’ve added up your expenses and they are X but you say your income is only Y. Explain!”
If you can’t then HMRC will assume the difference is undeclared income. That’s all HMRC needs and it’s then left up to you to provide hard evidence. For example, your son won the lottery and gives you £2k a month pocket money and there are the credits on your bank statement and the debits on his.
The better way to clarify your outgoings in the enquiry year (or a sample period) is to show:
• Your spending on various categories from your bank statements and credit cards
• The funding of significant assets for example a house or car
• The cash available to you and the sources
• Broadly how that cash was spent
• The amount and sources of other incomings other than declared on your tax return, for example loans, sale of a car, gifts etc.
Essentially you are doing a rough personal balance sheet and the key points are usually whether the cash available for spending looks reasonable and your ability to evidence the source of non-taxable income.
A much better way of calculating lifestyle expenditure is to keep a diary over a month, logging each purchase as it comes up and then give that information to HMRC.
So you can refuse to answer the lifestyle questions directly but you must – as above – give them the information they need to work the case. That way you are cooperating, which is the name of the game to keep penalties low or at zero.
You must show that you have cooperated with HMRC within reason and within the law.
This is an extract from Penalties for inaccuracies in returns and documents DECODED which costs £10. You can get more information and buy the ebook here.