"The taxman is happy with my return' - Sure?

As we move towards the first filing deadline for 2009/10 personal tax returns you may find it helpful to reflect on a key aspect of our tax system. Many people seem to misunderstand how things work. They mistakenly assume their affairs are in order long before they have any real evidence that this is actually the case.

The concept of "Process now - check later" - is a key element of our self assessment tax system. It means that tax returns are processed by computer long before a real person checks them. In most cases the computer then generates statements showing the tax payable or repayable based on the entries on the tax returns as submitted.

At this point no one has reviewed any exception reports generated by the computer and no real person has checked any of the entries or disclosures on the tax returns. So little comfort can really be drawn from the statements issued confirming that a tax return has been 'processed'.

And it is especially important to keep this in mind when you hear stories about how people have supposedly got one over on the taxman. This includes those who have claimed what might be spurious deductions on their tax returns, omitted to report potentially taxable income or secured the hoped for tax treatment of a tax avoidance scheme.

So when you hear anyone boasting about their own success or that of their clients just remember that the real timescales are much longer than they might imply. This is especially true for anyone who is referring to transactions they have undertaken since 6 April 2009. Transactions undertaken from that date through to 5 April 2010 will be reported on tax returns that need to be filed (online) by 31 January 2011. HMRC then have 12 months from the date the return was filed (so potentially until 31 January 2012) to start asking questions.

So it's a little premature to determine your own attitude and approach by reference to the way that someone else has supposedly beaten the taxman on a tax return that has yet to be checked or challenged.

"Tax evaders nabbed on facebook"

This is a headline doing the rounds at the moment. It reflects a development to which I referred on this blog last February: HMRC investigating posts on social media.

In the US, even the Wall Street Journal is reporting that:

"Tax deadbeats are finding someone actually reads their MySpace and Facebook postings: the taxman".

It is only a mater of time before tax evaders in the UK are caught in exactly the same way. I'm not sure how easy it would be to start with entries on a 'social' network and track back to see if the person concerned is fully declaring their business profits or is claiming excess tax credits.

On the other hand it could be relatively easy to source all sorts of data and evidence from the internet when someone is being investigated for alleged tax or benefits fraud. Remember that Google is a history book because "Google never forgets" (as noted in this 2005 article). At some stage in the future HMRC may well look back and identify incriminating blogs, tweets and comments you have posted online. These may evidence:

• an earlier start date of your business than you had previously disclosed;
• more extensive activities (and profits?) than previously disclosed;
• the personal nature of trips claimed to be for business purposes;

and so on.

The following are simply examples of trails that we leave and which could help identify possible tax evaders:

• Adsense account with Google
• Business page on facebook
• Business promotion on BT Tradespace or other online business forums
  
• Promotion of your own services through twitter or other blogging platforms
  
• Business focused online profile on Ecademy, LinkedIn or any of the hundreds of other online forums and 'social' networks
• Affiliate links and adverts on your website or online profiles - eg: for Amazon
• Blog boasting re business and promotional activities

And then there are the trails of friends which, as the WSJ reports can enable the taxman to track down suspected tax evaders and benefit cheats.

Please add your thoughts and other suggestions below - if you dare! Remember the taxman could be watching....

HMRC investigating posts on social media

I picked up this news through Twitter * at the end of last year. Ok, I guess most readers of the TaxBuzz blog haven't previously encountered that micro-blogging medium. Nor do I think you need to as I've explained on my separate blog for ambitious accountants.

But this news does mean that you need to be more aware of what your clients could be doing online that is exposing them to HMRC scrutiny. In effect this new development is a natural extension of HMRC monitoring the small ads in local papers and more recently Ebay and other online 'auction' sites. We're also used to the stories of how HMRC staff walk around the streets in Wimbledon to see which home owners have let their home and/or gardens to tennis fans during the annual tournament.

Do you know which of your clients are promoting their hobby through social media such that they might appear to be trading? I'm referring here as much to the so-called 'non-working spouses' whose tax returns have always been simple and straightforward to complete.

Might there be evidence online of when a new trade started (earlier than was notified to HMRC)? Could your clients be incriminating themselves when talking about hobby activities without intending to do so? Maybe simply boasting or talking up their sales and business experience?

Your clients could be doing this using any of the HUNDREDS of different online social media websites and facilities.

Don't be misled. Many 'social networking' sites have a big focus on business as distinct from or in addition to 'social' activities. The most common of such sites are probably: Myspace, Facebook, Twitter, LinkedIn, BT Tradespace, Ecademy and UK Business Forums. In addition to these your clients may have personal websites and blogs (which can be quickly and easily set up for free) through which they are promoting what appears to be a business or a trading activity - eg: through affiliate sales (eg: for Amazon) or through a Google adsense programme. The possibilities are endless. Even Facebook provides business promotion facilities.

Maybe it's time to review the questions you will ask your clients about their trading activities when you start the process of collating information for next year's tax returns?
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*Twitter is a micro blogging service that encourages users to simply Tweet their answers to the question - "What are you doing right now?" The potential uses of Twitter go a lot wider than this and there are many related websites and services that make it easier to use and to gain benefits from so doing.

Discovery assessments (again)

Listening to Keith Gordon of Atlas Chambers speaking about Discovery assessments at a seminar today I feel I should amplify my earlier comments (10 April) on the same subject.

Keith stressed the importance of appealing against discovery assessments within the 30 day time limit. If you have the slightest doubt you should make a protective appeal. You may decide later to withdraw your appeal but once 30 days have passed you're too late.

Keith noted that HMRC often raise discovery assessments that are not valid. As in where the circumstances of the case do not fall within the legislative constraints surrounding discovery assessments. They are only lawful when 3 essential elements exist:

1- HMRC must have made a discovery (see SP 8/91)
2 - There must have been a loss of tax; and
3 - EITHER:
a) Insufficient information was supplied by the taxpayer
OR
b) The taxpayer's conduct was negligent or fraudulent

Discovery assessments enable HMRC to generate 'easy' money as appeals are often not made within the 30 day time limit even though the 3 tests have not been satisfied.

If you are in any doubt about the validity of a Discovery assessment, you can find help here in the Tax Advice Network, via a simple 'search' eg: for Discovery assessment.

HMRC have issued a discovery assessment. Let's appeal. Hmm.

I'm a simple soul. I adopt a pragmatic approach to tax. Perhaps it's one of the reasons why I don't give tax advice myself any more. (There are plenty of advisers in the Network who can do that very well).

A few years back I was part of a delegation of accountancy and tax professionals who went to see HMRC to find a pragmatic solution to the consequences of the Court of Appeal decision in the 'Langham v Veltema' case. The case and subsequent guidance set the future ground rules for the issue of Discovery assessments by HMRC.

I've just read a report of a more recent case re Household Estate Agents. HMRC issued a discovery assessment. The taxpayer appealed and the Commissioners found in their favour. Hooray?

Guess what? HMRC appealed against the Commissioners' decision and won. This is not unusual when the taxpayer represents themself or has an inexperienced advocate before the Commissioners.

I cannot stress enough how critical it is to anticipate what will happen if HMRC lose when you take a case to the Commissioners. The taxpayer never gets a second chance to introduce new evidence. If you go the Commissioners and you are prepared to fight on (win or lose) you must be fully prepared before the Commissioners' hearing. This generally requires specialist expertise. Not simply from someone who has been to the Commissioners before but from someone who really understands what happens thereafter.

I'm a simple soul. I know I don't have the requiste expertise. But I know where I'd turn if I was in that situation. (Another example of how the Tax Advice Network could be useful!)