Why does an Investigation Happen?
HMRC may identify tax issues from information they have collected from third parties or from their own investigation and analysis using their Connect computer system, or they may arise from a routine PAYE or VAT visit.
The main types of errors which cause enquiries and investigations are:
1) A simple recurring error in the way that transactions are processed in a business, for example applying the wrong VAT rate.
2) A one-off error relating to a routine expense, such as mistakenly claiming a deduction for a disallowable expense
3) A one off error relating to an unusual transaction, such as incorrectly claiming entrepreneurs’ relief on the sale of a business, failing to apply PAYE to a share transaction, or failing to correctly account for VAT/capital allowances on the sale of a commercial property.
4) Deliberate tax evasion. We are unable to assist in cases of deliberate tax evasion.
Avoiding an Investigation
Whilst routine visits from HMRC are perhaps less common than in the past, they do still occur for PAYE and VAT and accordingly we offer Health Checks for these areas. For one-off transactions, we can advise on the tax implications and reporting requirements. Together these services help to provide comfort that tax is being dealt with correct and identify potential problems so that they may be resolved without being identified via an HMRC investigation. This sort of pre-emptive action has three key benefits:
1) Peace of mind that you have done your best to ensure you have complied with your tax obligations.
2) If problems are identified, self-correction and disclosure to HMRC will result in lower penalties than if HMRC find the problems.
3) In the event of a sale of the business, the buyer will undertake a due diligence exercise, which will typically cover similar areas to a Health Check. If they identify problems, it can result in a reduction in the consideration paid, a retention of part of the proceeds or a delay in the sale. Taking action in advance can reduce these commercial risks.
PAYE Health Checks
Whilst an HMRC visit will consider the basic operation of the PAYE system, a significant part of it will be spent looking at expenses and benefits provided to employees and also considering the operation of any share schemes.
Our PAYE Health Check is based on the checklist used by HMRC during their visits. Whilst we will look at the basic operation of the scheme, since that element is now normally either outsourced or produced automatically, our main focus will be on benefits, expenses, non-employee workers and share schemes, which in our experience is where most problems arise.
VAT Health Checks
Our Health Check looks at the operation of the VAT system in your business. We consider all the types of supply made by your business (including reverse charge supplies) to ensure output tax is being accounted for correctly. We then look at the recovery of input tax and any partial exemption restriction as well as the VAT treatment of any properties and the operation of any VAT schemes.
As for PAYE visits, it is common for errors to be identified during HMRC visits and so our Health Check will look at the same sorts of areas as HMRC would look at during a visit, with a focus on the areas of highest risk.
We can advise on the tax consequences of a transaction and if/how it is required to be reported to HMRC. If there is doubt as to the tax consequences, it may be possible to apply to HMRC for clearance.
Whilst advice after the event is better than no advice, it is far better to seek advice before the transaction takes place. There are two reasons for this:
1) There may be tax consequences requiring to be dealt with immediately (for example to charge VAT or account for PAYE), or within a very short time thereafter (14 days for a “s431” election to ignore restrictions attaching to shares).
2) There is some clarity as the full commercial impact of a proposed transaction, for example if it is assumed that entrepreneurs’ relief is available, but it turns out that it is not, the tax charge doubles from 10% to 20%. This may affect the decision to proceed with the transaction, or require the transaction to be structured differently.