Telling the taxman about undisclosed earnings

The lead comment piece in this week's Taxation magazine comes from Mike Thexton who, like me, regularly lectures to accountants. The article is a wonderfully told story about a recent experience he had after a friend sought his help with resolving a tax problem. And there is a key lesson I want to highlight in this blog post. If it resonates with you please add a comment below.

Mike says it all started with 'the dreaded question'. When someone who knows you are an accountant (or in his case a VAT lecturer) asks for your help in resolving a tax problem that requires knowledge and experience way outside your comfort zone. As Mike says, it's because people tend to assume that accountants know about all things tax, just like they assume that doctors know about all things medical.

Mike describes himself as "A VAT lecturer who prepares a few personal tax returns each year - I have never dealt with disclosure and settlement of underdeclared liabilities." He then asks himself a key question: "Should I simply pass [this] on to someone else?"

When I read this my mind immediately went back to a key paragraph in the Guide to Professional Conduct in Relation to Taxation'. (I sit on the pan professional body working party that is updating the 2004 version for the ICAEW, CIOT and 5 other professional bodies):

“Members will from time to time find themselves having to advise on matters which require specialist knowledge. In such circumstances they should be careful not to go beyond their own level of competence and, if necessary, should seek help from a specialist in the field”.

Mike complied with this advice and sought the input of a friend who chairs the tax investigation service at Baker Tilly, a top ten firm of accountants.

I've summarised below some of the key lessons drawn from Mike's article:

• "Do not do this by yourself if you have no experience" - This accords with the Guidance above and was the recommended advice given to Mike by John Newth;
• "Find someone who knows what to do. The client may baulk at the level of fees, but it is likely to be worth it in reduced trouble and penalties"
• "What was unfamiliar to [Mike] was routine to someone who works in investigations."
• You need to address the underpayment of Class 2 NICs totally separately to the underpaid income tax and Class 4 NICs which were to be covered by the main settlement.
• The relative speed of securing a full settlement with maximum mitigation of penalties when you know what you're doing.

And possibly the most surprising observation of all - that Mike found his "limited adventure in investigations was an unusually positive experience". He also found the local tax office "helpful, efficient and reasonable." This is probably a reflection on the way that Mike and his friend approached the matter and that they did so as guided by a tax investigations specialist. What do you think?

For others faced with similar situations I would suggest that the independent tax investigation specialist members of the Tax Advice Network should be your first port of call.

No £100 penalty notices until February 2009

In my posting on the blog yesterday I suggested that the 31 October filing deadline for tax returns is a white elephant.

There is one other piece of the jigsaw that I should clarify. It was the one thing I wasn't absolutely clear about until recently. That is at what point would HMRC's computer start issuing £100 penalty notices for paper based tax returns filed late (in November, December and January)?

As the late filing penalty legislation was unchanged I was pretty sure (but not 100% confident) that HMRC's computer would NOT issue penalty notices until after the 31 January deadline.

Imagine filing a paper based tax return in November 2008. In theory this might trigger a £100 penalty notice. This would appear on the next statement of account issued to identify the tax payable on 31 January, once the late tax return was processed. Assume then that the full balance of the tax and penalty was paid by 31 January. Well, the £100 would then be refundable as there was no unpaid tax at 31 January. Equally I couldn't imagine HMRC using heavy handed collection procedures to chase for prompt payment of the £100 penalty knowing that it could well be repayable within a matter of weeks.

As I say, I was pretty sure that HMRC's computer would only charge the £100 penalty if a paper based tax return was filed after 31 October AND there was outstanding tax at 31 January. And despite all the hype and the focus on who would or wouldn't have a 'reasonable excuse' for late filed paper based tax returns, I've now seen definitive confirmation as follows:

A penalty for late filing of a paper return will not be generated by HMRC systems until after 31 January 2008. This is to allow HMRC to determine the amount of the penalty, which is £100 or the amount of tax outstanding at 31 January, whichever amount is smaller. The penalty will therefore be reduced to nil if all tax due has been paid by that date.

The self-assessment statements that go out from 24 February will therefore either show a penalty that is still outstanding, or a penalty that has been reduced to nil.

NB: The position is NOT the same for partnerships - as explained in yesterday's post and an earlier one specifically about partnership tax returns.

Is the 31 October deadline largely a white elephant?

In Summer 2007 I was speaking at a series of seminars around the UK as part of the ICAEW Tax Faculty's annual Roadshows. One of the issues I addressed was the potential impact of the new filing deadline.

Everyone was aware that Lord Carter's original proposal had been watered down in response to pressure largely from the profession (and co-ordinated by my friend, Paul Aplin). On each occasion I spoke I asked the question:

"But what does the 31 October filing deadline mean in practice?"

The answer I gave surprised most delegates and was often challenged by members of HMRC who heard me in advance of their own speaking spots during the seminars.

More recently my conclusions have been challenged by some accountants who have been taken in by HMRC publicity for the 31 October deadline. However HMRC have now effectively confirmed what I've been saying for over a year:

If you file a paper based tax return in November, December or January you will not be liable to pay the £100 late filing penalty as long as all tax due is paid by 31 January 2009.

So is the 31 October filing deadline a white elephant?

Well - not if you're involved in a partnership. The £100 penalty has always applied to the partnership and to each of the partners if the partnership return is filed late. And it's not rebated to nil. This is the reason why I highlighted, in an earlier blog, the importance of the deadline for professional firms that do not file their own partnership returns online.

It's also worth remembering that the enquiry window now closes 12 months after a tax return is filed so 'late' filed paper based tax returns extend the time period during which HMRC can open an enquiry into that return.

In their latest Self Assessment online filing update for agents HMRC skirt around the issue of the effective impact of the 31 October deadline. The focus is on whether a taxpayer who files a paper based return after this date has a 'reasonable excuse'. But this all seems to me to be a red herring. As long as all the tax due is paid by 31 January no penalty will be charged so there will be no need to consider whether there was a 'reasonable excuse'.

Finally I should stress that it would be unprofessional to suggest that clients can ignore the 31 October deadline simply because there is no effective penalty as long as they pay all of the tax they owe by 31 January 2009. But, in practice if you intend to file online and subsequently find that this is not possible for whatever reason you need not panic.

Ten tax mistakes that could result in professional negligence claims

• Omitting to consider the VAT implications of significant property transactions;
• Loss of tax credits as entitlement not claimed early enough – eg: when unincorporated business client suffers a loss;
• Failure to claim research and development tax credits before deadline;
• Omitting to reorganise group companies to reduce ‘avoidable’ tax charges;
• Failure to advise clients to correct their payroll procedures so as to reduce penalties;
• Omitting to provide ‘standard’ tax planning advice on arrival or departure from UK, on mergers, on acquisitions, pre sales;
• Ignoring consequential adverse implications leading to avoidable tax liabilities (eg: VAT, SDLT, IHT, NICs, Customs duties etc) when giving commercial or ‘basic’ tax advice;
• Omitting to compute and report the tax consequences of transactions such as disincorporation;
• Failure to ensure that all relevant criteria are satisfied to facilitate a claim for specific reliefs (eg: Enterprise Investment Scheme);
• Assuming that there would be no liability to inheritance tax and failing to advice as to how the real liability could be reduced;

The above list forms part of the material covered in my regular talks for accountants and tax advisers on the subject of 'How to avoid professional negligence claims'

Doesn't the taxman trust tax advisers?

A recent Special Commissioners decision contains a number of important lessons for accountants and tax advisers as it effectively revolves around the issue of whether HMRC believe assertions made by accountants.

You can access the full facts and details of the case of Mr M Ransom v Revenue & Customs [2008] UKSPC SPC00708 if you have time to read them. If you do and you have any further observations, please add them by way of comments to this blog post.

The only matter on which the Special Commissioner had to reach a decision was whether an amended tax return for 2000/01 had been filed before the effective deadline of 31 January 2003. The taxpayer's accountant claimed that the return had been hand delivered to the Woking Tax enquiry office on the evening of Friday 31 January 2003. The Revenue however argued that the amended return was posted to the office and did not arrive until 7 February 2003.

For the record the return was being amended to reflect the decision in Mansworth v Jelley. This was only published in December 2002. And let's remember that many accountants and tax advisers were under extreme pressure in January 2003. Everyone was trying to complete the necessary amendments and claims for clients who could benefit from the Revenue's published interpretation of the implications of the decision.

Returning to the present. What are the lessons that accountants and tax advisers can learn from the Ransom case?

1 - As I have recorded on this blog before (in the context of discovery assessments), it is crucial to be able to evidence all statements that are to be made before the Commissioners. There will be no second chance to represent the evidence;

2 - It is risky waiting until 31 January to file paper based tax returns and amendments to tax returns. Given the new 31 October deadline for paper based returns this issue is less likely to recur;

3 - The time lag between the start of a dispute or a challenge with HMRC and the case reaching the Commissioners can be years. In this case the argument started FIVE years ago. And this was a relatively straightforward question: When was the amended tax return filed?

4 - If HMRC have reason to question your honesty or your judgment they will pursue the matter. Ultimately the Revenue's position in this case effectively impugnes the character of the accountant in question;

5 - Even when you are in the right, do not under estimate the time and effort that will be required to produce all necessary evidence to support your contentions. In this case the accountant and four colleagues all gave evidence to counter the Revenue's challenge;

Do you have any observations about the implications of this case? Please add your comments to this blog post.