Keith Precce writes:

It is well known that being the subject of a formal enquiry by the tax authorities can be tiresome, frustrating and stressful, to say nothing of the costs involved in terms of professional fees. For those who are not professionally represented, an enquiry can be a bewildering and even harrowing experience.

For the tax consultant, being called in during the middle of an enquiry presents its own problems. Typically the client will be feeling harassed by the repeated demands for detailed information, not only about their business activities but often also about their personal and private affairs. If an accountant has been acting in the case, it might be someone who is inexperienced at dealing with formal enquiries and thus easily bullied by tax officials who appear to be increasingly aggressive in their attitude and approach. The Revenue Inspector or Compliance Officer conducting the enquiry will often be frustrated by a lack of progress and feeling under pressure from his superiors to achieve an early settlement.

Typical case
The particular case I have in mind was typical in several respects. The Tax Return under enquiry had been submitted by a professional accountant. However, the accountant concerned had absolutely no experience of defending clients who were subject to full enquiries into their business accounts.

The accountant had allowed his client to attend an interview with an Inspector of Taxes, unrepresented, and the client had thereafter been subjected to what can only be described as a bullying campaign. The Inspector had issued demands for tax and interest totalling £44,000, the basis of which seemed to be a combination of misunderstandings and guesswork. Threats of statutory penalties had been issued, based upon a percentage of the additional tax liabilities.

Home meeting
This case was not so typical in other ways. The taxpayer was a single woman living alone, who was severely disabled and who could only get about by means of a wheelchair. On being summoned to an interview with the Inspector of Taxes, the taxpayer had asked if the meeting could take place at her home address, to save her the trouble of travelling and negotiating entry to a public building. For some inexplicable reason, her request was refused, and she was compelled to struggle in to the local tax office.

As a former Inspector of Taxes, I found this astonishing. The Inspectors involved in compliance work have always been advised and encouraged by their employer to seize every opportunity to meet the taxpayer at their own premises. If it were a place of business, there would be obvious benefits in witnessing the physical context in which the business was being carried on.

In the case of a private residence, it would provide an opportunity to gain an insight into the taxpayer’s lifestyle. More to the point from a legal perspective, the Inspector has no statutory right to demand a face-to-face interview, so if the taxpayer suggests a meeting at their own or their accountant’s premises, the Inspector should have the good grace to comply. To oblige a disabled taxpayer to travel to the Revenue’s premises is inconsiderate to say the least. Whatever happened to customer service?

Interview
At the interview, the taxpayer had to concede that the business records were far from perfect. The accountant had failed to account for stock on hand and some expenses appeared to have been claimed in the wrong period. The Inspector raised some doubt as to whether all of the cheque takings had been included in the accounts and queried whether some of the revenue expenditure should properly have been treated as capital.

From the taxpayer’s standpoint, these were technical issues that she could ask her accountant to explore, with the expectation that they could readily be resolved. If some additional tax were found to be payable, the amounts concerned should not cause any difficulty. What the taxpayer did not know was that the Inspector had been trained to treat any deficiency in the business records as a green light to construct a Business Economics exercise, based upon any information she could get her hands on.

Inaccuracies
Following the interview, the Inspector issued some notes of what had been said, inviting the taxpayer to alert her to any inaccuracies. The taxpayer pointed out to her accountant that some of the things recorded in the Inspector’s notes had been taken out of context and were not an accurate reflection of the facts, but it appeared that the accountant failed to see the importance of making this clear to the Revenue. The Inspector proceeded to issue Business Economics computations, which suggested that cash sales had been massively understated, for the year under enquiry and earlier years, despite the fact that as far as the taxpayer was concerned, the business had been an unmitigated failure.

It took a full 12 months for me to convince the Revenue that their Business Economics exercise was misconceived. Even when physical evidence was put forward to demonstrate that the Inspector had got her facts wrong, she clung desperately to her stance that the taxpayer had given certain answers to her interview questions that had not been amended or queried when the interview notes had been issued.

It was also alleged that if the business losses were genuine, it was incredible that a loss-making business would have continued to trade for as long as it did. All the Inspector could suggest was an appeal hearing before the General Commissioners, or another meeting to negotiate a monetary settlement.

Stress
The stress experienced by the taxpayer increased. She had ongoing health problems and severe difficulties at work. The business had failed, her source of employment was in jeopardy, and consequently she was afraid of being unable to pay her mortgage, let alone find the cash to fund professional representation at another meeting with the Revenue or a hearing before the General Commissioners. I pleaded with the Revenue to review the evidence before them and to resolve matters, without resorting to proceedings that would substantially increase my client’s costs.

Eventually the case was referred to another Revenue office for review, preparatory to being listed for a contentious appeal hearing. Thankfully a more level-headed Inspector decided that the basis of the Revenue’s case was flawed and not worth the additional expense that would be incurred by the public purse should the argument be pursued.

The result was that the Business Economics computations were abandoned, and a settlement was quickly negotiated around the technical points that had been raised at the interview two years earlier. The final tax bill was £1,200, a far cry from the earlier demand of £44,000.

The chief lesson to be learnt from this story is that it is essential that taxpayers obtain adequate professional representation, especially where full enquiries are concerned. It is not compulsory to attend meetings with Revenue staff, but if you do decide to attend, you need proper representation. Any official enquiry can present difficulties, but if a full enquiry is allowed to get out of hand it can make your life a misery.

Keith Preece
Qdos Taxwise

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Susie Hughes
The Editor © Hardhatter 2007