Tax twit of the week - Bernie Ecclestone

Last week the F1 supremo, Bernie Ecclestone was challenged by a court in Munich as regards a payment of £27m he made to Mr Gribkowsky, a former banker.

Mr Ecclestone admitted that the money was paid to discourage Mr Grobkowsky from making accusations that would have led to a potentially costly UK tax investigation.

Mr Ecclestone claims that he had done nothing wrong. However he was clearly concerned that either the cost of defending his position, if challenged by HMRC, or of the back taxes, interest and penalties they would have secured would come to MUCH more than £27m.

Somehow I suspect that HMRC may take a look into his affairs now that the quantum of his concerns have been publicised. Don't you? For publicly explaining that he paid £27m in an effort to avoid damaging allegations about his tax affairs being made public, I will be sending Mr Ecclestone my Tax Twit of the week award.

"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.

Caprice asks the taxman to enquire into her tax affairs

My attention has been drawn to the Weekend FT - money section - which contains an interview with Caprice. Frankly she might just as well have written an open letter to the taxman asking them to open an enquiry into her tax affairs.

Caprice Bourret, 38, is a well known 'super-model', actress and businesswoman. She claims to have a full-time accountant in her office who is very pedantic and a great help. However - either the accountant is also very naive or they were unaware of the interview in which Caprice proudly announced:

"I have been interested in property since my mid-20s, when I invested in government repossessions both here and in the US. After careful research, I would select a place, hold on to it for two years – so I did not have to pay capital gains tax – then I would fix it up and flip it. I made a lot of money doing this, sometimes doubling my original outlay."

Is this just what MPs were caught doing last year as part of the expenses scandal? Er no. Caprice claims to have been buying repossessed properties, doing them up and electing for them to be her main residence for CGT purposes. Almost by definition she has not been living in any of them. As an image conscious 'super-model' it's hardly likely is it? And yet residence of some sort is required to qualify for main RESIDENCE relief.

Residence is not defined in the legislation , but the, not unreasonable, HMRC view is that the person must live there for at least some of the time. So if Caprice never actually slept at these places nor ever treated them as any sort of home, then none qualified for the main residence exemption and the elections she made were inappropriate. You don't have to live in an elected property full time, but you must live in it for some of the time - as did each of the MPs who were flipping their properties before selling them for a profit.

HMRC's help sheet 283 makes a similar point:

Your period of ownership begins on the date you first acquired the dwellinghouse, or on 31 March 1982 if that is later. It ends when you dispose of it. The final 36 months of your period of ownership always qualify for relief, regardless of how you use the property in that time, as long as the dwelling-house has been your only or main residence at some point.

There is another related point here that is often overlooked too. Buying properties with the intention of selling them at a profit (and then doing so without ever making them your home) makes the profits subject to income tax - not capital gains tax.

I would be surprised if HMRC ignored such a high-profile interview. It is quite likely to be included as evidence that feeds into the risk assessment which determines whether an investigation should be opened. This has long been part of their strategy for identifying high profile targets for investigations.

About the only thing that could save Caprice is the falling HMRC staff numbers that may mean there are insufficient resources available to pursue such a public confession.

What is worse? To be a tax cheat or a benefit cheat?

Three issues conspired to prompt this post.

The first was a few months back when I was working from home. It seemed that commercial radio was full of adverts encouraging tax credit claimants to notify HMRC whenever their circumstances changed. In effect to voluntarily admit they their tax credits should be cut. "Some chance" I thought. These were not the equivalent of the adverts encouraging the prompt submission of tax returns, which are the only vaguely related tax advert I can recall.

Then, on last week's 'Now Show' on Radio 4, which I have already flagged on the Accountant jokes and fun blog, came reference to the different ways in which the public are encouraged to report tax evasion and 'benefit thieves'.

And finally I have just read a posting on the Tax Research blog: Benefit fraud is 624 times more serious than tax evasion. Leaving aside the admitted hyperbole in that post there is a serious point with which I would concur.

Of course there are differences between those who deliberately claim benefits to which they are not entitled and those who deliberately fail to notify their liability to pay tax or who lie on their tax returns. There is also the confusion caused by describing these tax evaders as tax avoiders. This lumps them in with otherwise law abiding taxpayers who have chosen to adopt what they are advised are strategies they can pursue to reduce their tax liabilities whilst staying within the letter of the law. (I'm no fan of such schemes but the taxpayers involved at least have grounds for believing they are within the law).

I suspect it is far easier to identify, track, catch and prosecute benefit cheats than it is to do the same with tax cheats. Are sufficient resources allocated to the latter however? I think not and the last Government's constant reduction in manpower within HMRC makes such prosecutions even less likely. I think that's a shame as more people perceive they are getting away with their tax fraud. They tell their friends who may choose to copy them and so the level of tax fraud grows. I know our tax system is complicated and that some people get caught out by unfair tax laws. That's again quite different to the deliberate evasion of taxes. And more resources should be applied to stop it. Do you agree?

Did Derrick Bird take advice to help him handle the taxman?

It is being reported that Derrick Bird, the gunman who killed 12 people in Cumbria, feared he would go to prison because of a tax investigation. There is reference to a sum of £60,000 he held in an offshore account and at least one suggestion (in the Sun) that this had created a £100,000 tax bill for the "psycho cabbie".

This being the TaxBuzz blog I'll stick to the tax related elements of the awful story. Attention will shortly turn to HMRC and whether the taxman's tactics included the threat of jail or if this was an unfounded fear. It's very much only ever a last resort and HMRC normally make clear that if a tax evader makes a full confession they can avoid prison. The threat is made to encourage compliance and payment of outstanding taxes.

Plenty of people will try to blame HMRC (a convenient bogeyman) for pushing Mr Bird over the edge. I doubt that's fair although stories abound of HMRC making threats to persuade taxpayers to settle their tax bills. Sometimes they have simply lost patience. Other times they are exceeding their authority but only REAL experts in dealing with tax investigations, and in possession of all the facts in this case, will know this for sure.

Even some accountants who have limited experience of such challenges from HMRC may be unaware of their new powers. This lack of familiarity with tax investigations can lead to protracted arguments that are destined to fail but only after unnecessary professional fees have been racked up - perhaps by someone making unrealistic promises as to what can be achieved. It's one of the reasons that so many accountants choose to work with tax investigation specialists like those who are members of the Tax Advice Network.

Did Mr Bird have good cause for being so worried about the taxman? Had he tried to negotiate with HMRC without professional help? Did they follow their procedures? We may never know. The fact is that HMRC have to walk a fine line. They are rightly charged with collecting tax due in respect of undisclosed income and gains. No one wants to pay up. When faced with tax evasion (for that's what it is) HMRC will issue demands for what they consider to be due and will follow these up. No one should HAVE to engage specialist professional help to resolve matters but it will often pay to do so. That's life I'm afraid.

Should lawyers be exempt from disclosing their tax advice?

Accountancy Age is reporting that the taxman is set for a battle with the legal profession over lawyers’ attempts to keep tax advice confidential.

One unnamed law firm has apparently sent out a circular that says: ‘Bring your tax issues to us so we can ensure that HMRC can never get access to them’ – meaning that they think legal professional privilege does that. The taxman doesn't agree and wants to ensure that the age old concept is not used to aid tax cheats.

The concept of legal professional privilege is more complex than many people assume. However most tax advisers accept, reluctantly, that the rules apply differently to lawyers as compared with non-lawyers. And the application of the rules to lawyers seems to extend to non-lawyers who are employed by law firms. I suspect this is one of the reasons for the movement of some tax investigation specialists into law firms - the most recent example bring those who left Tenon and moved to McGrigors.

The legal and accountancy professions thus find themselves on opposite sides of the argument. Accountants want equality of treatment. But no one expects this to mean that legal professional privilege will be extended to allow taxpayers to secure privileged tax advice from accountants. Lawyers on the other hand however want to retain their exclusive rights and the Law Society has engaged a QC to argue the point for them.

The way that the rules of professional privileged apply to different professions has long been an issue. It started to become of real concern when the rules for Disclosure of Tax Avoidance Schemes were first published in 2004. As a result of challenges by the CCAB the rules were amended to ensure that 'privileged' advice still had to be disclosed albeit without breaching the rules of privilege.

Since then the issue has been bubbling away behind the scenes. I for one am pleased it is now back in the public domain. Whatever the merits of the concept of professional privilege generally surely it should not extend to tax advice which would be disclosable if provided by any other professional.

What do you think?

Vantis tax advisers to face charges of “cheating" re tax scheme

Today's report in the Sunday Times, headlined: Stars caught up in £219m tax 'scam' concerns "two leading City accountants who have been charged with a multi-million-pound tax scam involving celebrities, sportsmen and other wealthy clients exploiting charitable donations".

If the reports are true, Roy Faichney and David Perrin (neither of whom are qualified as accountants*) will be facing charges around 3 years after their homes were raided over, what I assume to be, the same £100m tax avoidance scheme used by leading sportsmen, musicians and investment bankers. The Sunday Times reported this story and outlined the scheme in December 2006. At the time many tax commentators thought that HMRC's actions were heavy handed. I know I did. The same 'stars ' were named then as are mentioned in today's paper, ie: Martin Corry, captain of the England rugby team, and Yusuf Islam, the musician formerly known as Cat Stevens.

Not surprisingly Vantis is reported to have announced that "David Perrin and Roy Faichney, employees of Vantis Group, will be strenuously defending any charges brought against them."

In my talks I often stress that there can be a significant time lag between when tax advice is given, acted upon and tax refunds received and when HMRC will challenge the transactions or tax refund claims. All too often promoters of aggressive schemes imply that all is well when HMRC have received a disclosure of the scheme and have permitted tax refunds to be paid out. But this is rarely the whole story. The full picture typically only emerges many years down the line.

There was another example of this time lag earlier this year. The Mercury Tax Group announced that it was preparing a damages claim against HMRC following a court hearing that ruled the taxman had unlawfully obtained warrants to raid the firm’s offices and the home of its chief executive. The raid, related to a 'gilts strip scheme' took place almost two years earlier and was widely considered to be an example of HMRC using a sledgehammer to break a nut.

In both cases (Mercury and Vantis) I would stress that mere accusations by HMRC are not proof that the law was broken by the accused. The old maxim "Innocent until proven guilty" is as true in tax planning as it is in all other cases. I'm sure that in each case the advisers were satisfied that their advice to clients constituted legal (albeit aggressive) tax avoidance rather than tax evasion. In other words they did not intentionally break the law nor encourage clients to do so. And having taken Counsel's opinion, as I'm sure they did, they would have expected to be protected against accusations of illegal activity. As would their clients. And the Mercury case has progressed such that it seems that HMRC eventually backed down.

So why do I draw attention to this case on the TaxBuzz blog?

Quite simply because it supports my contention that pre-packaged aggressive tax avoidance schemes are more risky than some advisers would have you believe. And many of those who promote such schemes do not have the technical understanding of the risks to ensure that their clients fully appreciate them before they decide whether or not to proceed.

As is well known I am no fan of aggressive avoidance schemes and am uncomfortable with the idea of 'planning upto the wire'. Interestingly I am finding more and more experienced tax advisers seem to take a similar view. For example, last week a very well known tax lecturer told me that they would never put their name to any book or article titled: "How to avoid tax on...."

The times they are a-changing.

*For the record I know Roy and David as I used to work with them at what was then WJB Chiltern plc before they left to join Vantis almost 6 years ago. I always liked them but we have not spoken for some time.

Earlier relevant posts:
- Bending vs breaking tax rules
- Tax avoidance is a card game - the metaphors multiply
- Tax avoidance - what are you allowed to do? A simple guide.
- Tax avoidance schemes - a simple guide
- Naive promoters of tax avoidance schemes
- Five facts all accountants need to know about tax avoidance schemes
- Five more facts all accountants need to understand about tax avoidance schemes
- Tax cheats need to think again

MPs' expenses: ministers not exempt from tax laws

Day 20 of the MPs' expenses scandal and HMRC have been forced to confirm that they are pursuing potential irregularities in MPs' tax returns. At least this is what some of the media are reporting.

Today's Daily Telegraph notes that HMRC confirmed that MPs were not exempt from tax laws and that tax must be paid on some expenses. In a statement it said:

“It’s a general principle of tax law that accountancy fees incurred in connection with the completion of a personal tax return are not deductible.

“This is because the costs of complying with the law are not an allowable expense against tax. This rule applies across the board.”

It now seems that more than 40 Ministers claimed and received reimbursement of accountancy fees as part of their Parliamentary allowances.

In recent posts on the TaxBuzz blog I have explained:

• The Green Book guidance that seems to allow such claims to be made
• The tax rules that make clear that such expenses are not deductible for tax purposes
• Why I consider it likely that Ministers will owe tax on their accountancy fee claims
  
• The tax rules that enable only self employed people to 'Do a Darling' and claim tax relief for their accountancy fees
• The tax questions that have yet to be asked and answered about the MPs' expenses scandal
  

I have also set up a specific page that contains links to the key formal guidance on such matters, including the current and previous editions of the Green Book, the HMRC guidance booklet "MPs, ministers and tax" and also The June 2008 report of the Members Estimate Committee which led to the latest edition of the Green Book.

Previous posts here on the subject address:

• MPs, Ministers and their expenses claims for accountants' fees
• MPs claiming tax relief for tax advice from an MP's spouse
• MPs' expenses - the Chancellor's claim for help with his tax returns
• MPs' expenses - The tax questions that have yet to be addressed
• Hazel Blears and Gordon Brown - a genuine gesture or deliberately deceptive?
• Tax Advice Network on BBC - twice in two days
• Flipping properties - avoiding CGT when you have more than one main residence

I'll huff and I'll puff - empty threats from the taxman?

The press seem to be reporting ever more stories of how the taxman is going to crackdown, challenge or investigate this and that. The implication is that all who do such things are at risk of a heavy handed enquiry - and that what they are doing is wrong.

Here's an example from yesterday's Sunday Times:

HM Revenue & Customs (HMRC) is thought to have begun a fresh wave of investigations into so-called “image rights” payments by Premier League clubs to their playing staff.

Such arrangements, which are entirely legal and are commonplace, allow players to channel part of their pay into private companies set up for their benefit.

I've highlighted a key point. As in many such cases when you read carefully it becomes clear that the tax avoidance activity in question is 'entirely legal'. I drew an analogy between this approach to tax avoidance and the rule regarding MPs expenses on the blog last week (and indeed last year!)

It seems clear that the objective of these announced crackdowns can only be to catch out the amateurs - those who have copied the avoidance technique but without taking informed professional advice. As a result they have probably missed the subtle nuances that are required to achieve the desired tax outcome. And this means that the amateurs are at risk of getting 'caught' but that the experts continue to 'get away with it' - until the law is changed.

On the one hand this situation is great for tax advisers who are well placed to help 'amateurs' to secure the same tax benefits as the 'professionals'. On the other hand are the press reports simply scaremongering?

Recent and prospective cuts in staff numbers mean that HMRC do not have the resources to investigate many of the tax avoiders in question. And as long as the tax planning involved is legal the time and effort involved in such challenges could generate a better return if focused on chasing illegal evasion.

Would it not be a better use of time, effort and money if the law were changed to counter the tax avoidance in question? It may not be easy to achieve the desired outcome but it's not impossible either. Is it?

Taxman visits to home businesses - the truth

No one will be interested in this blog post. It contains the truth about the taxman's new powers of entry to enter your home. Don't bother to read on if you simply want reinforcement of the scaremongering that has been widely reported over the last few days.

The Times for example reported "HMRC given powers to raid home businesses" and that

"Anyone running a business from home could soon have an unannounced visitor — in the form of the taxman"

The Telegraph piece was headlined: "HMRC allowed to raid homes without warning"

Both papers and many others quoted just ONE firm of accountants (a decent firm to be fair) that had issued a press release giving a worse case scenario about how the taxman could use their new powers after 1 April. It includes the following statement, which is factually correct as far as it goes:

“The many thousands of business people and sole traders who claim expenses for 'use of home as an office' should recognise that from next month, HMRC has the right to enter their home to inspect business records. This power includes visits to any business premises, including any part of a residential home used as an office,”

Background
The new powers were introduced by Finance Acts 2007 and 2008. Over the last couple of years HMRC has held extensive consultations with professional bodies who have been very concerned about the extent of the new powers. HMRC has also made the official line very clear. Unannounced visits to private homes will be very few and far between. And I believe that.

When I was Chairman of the ICAEW Tax Faculty I met with many of the top officials from HMRC. I still see some of them at official functions. They are honourable people and I generally believe them when they explain how they intend the law to be applied. They require extensive powers to constrain the efforts of the worst tax evaders. They don't intend that their new powers will be used on a day to day basis.

Insufficient safeguards
Having said that I have also written previously on this blog about the widespread concern across the profession that taxpayers have insufficient safeguards to protect them from abusive use of HMRC's new powers. So you might expect me to agree with the suggestion that small businesses operating from private homes are suddenly at risk of imminent and frequent visits from the taxman - after all this is the scenario painted by the recent press reports.

My position is clear. I share the concern that others have expressed that the new powers could be misused - just like children enjoy playing with their new toys and learn to use them in unexpected ways. But that won't happen immediately. Of that I'm sure.

In practice
Richard Tyler writing in the Telegraph paints a fairer picture. He notes that:

"The new powers mean that income and corporation tax inspectors will have the same powers of entry and the longstanding powers enjoyed by Customs officials investigating upaid VAT"

There we have it. How often have home based businesses had such unannounced visits in the past? Rarely, if ever.

What this means is that if you are a compliant taxpayer you have nothing to fear. Contrary to the press reports, there is next to no prospect of the taxman starting to make unannounced visits to check up on people running their business from home.

If however you've been defaulting on your taxes you could expect a visit. If you've ignored requests from HMRC to produce your books and records for investigation you could expect a visit. And if you've been involved in tax evasion or even possibly 'abusive' tax avoidance schemes you could expect a visit.

But even then I don't expect such unannounced visits to take place in the near future. Indeed there is a very clear statement in HMRC's own instruction manuals for it's staff:

"a visit would only be justified in exceptional circumstances, perhaps to support a challenge to the amount of domestic expenses claimed as a business deduction."

And note even then such a visit would rarely be "unanounced".

HMRC's public comment
This features at the end of some of the recent press reports:

"HMRC does sometimes need to access premises connected with businesses to see such things as goods and assets where it is reasonable to do so, to ensure the right tax is being paid. Although HMRC is extending these powers, it is also extending safeguards. In particular, unannounced visits can only be made with the approval of specially authorised officers."

Bottom line
What this all means is that someone senior has to sanction an unannounced visit by the taxman. In practice it will be far easier for them to make appointments. Even then they will only insist on coming to your home if there is no other way to secure the information they require. In most cases you will be able to go to the taxman's office. Better yet is to meet with him on neutral ground - eg: your accountant or tax adviser's office.

Is it better not to know?

Do you know too much? And what do you do if your answer is 'yes'?

Assume you have a client who has a tax problem and a friend of theirs suggests what seems to be a common sense solution. The client explains the situation and tells you of the proposed solution. Indeed it's not unknown for the 'friend' to be a commercial 'audit' partner.

If your tax knowledge is limited you may simply go ahead with the proposal wholly unaware of the adverse tax consequences. On the other hand, if you have sufficient understanding of relevant tax issues you may have to discourage your client from pursuing the friend's idea. That may be fine if you are able to identify an alternative course of action that achieves the same result. But if you can't?

Most professionally qualified accountants and tax advisers are obliged to comply with the IFAC code of ethics. This includes obligations to evidence integrity, objectivity and professional behaviour. The main accounting and tax bodies have gone further in their jointly published Guide to Professional Conduct for those working in tax. This includes the following:

“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”.

So if you KNOW that your knowledge is deficient, you are professionally obliged to involve a specialist.

But if you DON'T know that when you give advice then in all liklihood the client's tax return will be incorrect. HMRC may notice this before the enquiry window closes and start an enquiry. Alternatively they may not pick up the error until a later date and seek to make a discovery - which will be hard to resist as it's unlikely that sufficient disclosure was made on the relevant return. Or HMRC may never become aware of the transations in question.

If HMRC do either open an enquiry or make a 'discovery' then additional tax will become payable together with interest and probably penalties.

But if you did know the law you would be obliged to advise the client of the tax to be paid. And there would be no question of (unintentionally) waiting for HMRC to spot the mistake.

The same scenario arises when a well meaning adviser provides constructive but naive advice. In reality it may not achieve the hoped for tax reduction, or worse it may create an increased tax liability. But in the meantime the client is happy, thinks the adviser is wonderful and tells all their friends. The adviser is also happy as they have generated additional fees (in good faith).
And the client may get lucky, if HMRC never become aware of the issues.

However if an adviser has a fuller understanding of the tax law they may quickly conclude that there is nothing the client can do to reduce the tax due on the transaction. So the client thinks the adviser is unhelpful, the adviser has lower fees and the client pays more tax. Everyone is worse off.

Hence my opening question - Sometimes, is it better NOT to know?

Tax lost through the hidden economy

Here we go again. The House of Commons Public Accounts Committee (PAC) has published a new report today: HMRC: Tackling the hidden economy in which they state very clearly that:

There are no reliable estimates of the tax lost through the hidden economy

They add:

but it could be over £2 billion a year and involve around 2 million people.

So of course that's the figure that has been reported by all of the press. It is also used as a comparative for the number of 30,000 hidden economy cases that have been uncovered each a year since 2003–04. This leads to the suggestion that there is a detection rate of only around 1.5%. Whatever the truth of the numbers there is a long way to go and this PAC report sets out some very sensible actions that need to be taken. I don't agree with them all but that's not the point.

It was only last April that the National Audit Office published a not dissimilar report: HM Revenue & Customs: Tackling the hidden economy.

I'm sure the MPs on the PAC have done their best but it seems to me that the £2bn figure they have quoted above has been lifted from this report but not updated for inflation. The NAO stated that:

In common with other tax authorities, HM Revenue & Customs has sought to estimate the amount of tax lost from the hidden economy, but so far no one has been able to produce robust estimates. In 2002 the Department published estimates of VAT losses of between £400 million and £500 million from between 125,000 and 180,000 businesses that should have been VAT registered but were not. Since that time the Department has continued to work on ways of estimating the amount of tax lost. For other taxes, the Department estimated in 2005 that using certain assumptions there were some two million ghosts and moonlighters with losses of at least £1.5 billion

Of course there needs to be a starting point and £2bn is a good a figure as any other to suggest the scale of the problem is enormous.

Back in 2000 Lord Grabiner reported on the Informal Economy. That report suggested that every year billions of pounds have been lost to the informal economy. And that 120,000 are working while 'signing on' at a cost of nearly half a billion pounds to the taxpayer.

All such estimates are intended to be used to highlight how cost effective it SHOULD be to deploy more HMRC tax investigators to root out those who are not paying their fair share of tax (to use one of the Government's favoured phrases).

Instead of increasing the number of well trained staff that HMRC have available to investigate, challenge (and if necessary prosecute) those who choose not to fully declare their taxes, the Government continues to cut their staffing. The emphasis seems to be only on providing incentives to come clean. But these are rarely thought through and have only limited impact.

Until Mr and Mrs Average see and hear regular stories of how cheaters are being caught out and made to pay, all the hot air in the world will simply evaporate to limited effect. In this regard I am simply echoing a recommendation from the PAC report:

For every thousand cases detected only two are prosecuted. The Department achieves limited publicity on prosecutions reducing the deterrent effect.

The NAO report was a step in the right direction. The PAC report builds on this and, if its key recommendations are implemented they will herald a brave new world - and plenty of work for tax investigation specialists. Bring it on!

Buy to let landlords facing more tax investigations

Middle class investors in property that they 'buy to let' are easy prey for HMRC tax investigators. It's very easy for them, for example, to find out who owns property which is not the registered main residence of someone on the electoral roll.

Most property owners declare their rental income on their annual self assessment tax returns and claim relief for the allowable deductions. They then pay tax on their net profit from renting out property.

The House of Commons Public Accounts Committee has just published a report: HMRC: Tackling the hidden economy. The report highlights the fact that not everyone is honest and that HMRC should do more to collect the unpaid tax on rental income. They want incentives to be publicised to encourage people to come clean. They have also suggested that anyone who fails to declare their taxable income from rental properties should end up with a criminal record.

This is all stern stuff. It's also true that some landlords who fully declare their taxable income claim too much by way of expenses. The most common error being to include the capital element of mortgage repayments. Only the interest charges can be deducted from rental income. This mistake can lead to significant underpayments of tax - even though all of the rental income has been properly disclosed on tax returns.

The potential for a 'crack-down' on buy to let landlords is just one element of a desire to increase the incentives for those who favour the 'cash in hand' culture. I will comment further on this in a separate blog post. In the meantime I should stress that the tax investigation specialist members of the Tax Advice Network are available to advise and support anyone who either wants to come clean or has left it too late and is now the subject of an HMRC enquiry. Experience shows that lower settlements are invariably achieved by SPECIALISTS in such matters rather than dabblers.

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.