Tax investigation- a true (horror) story

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This is our experience of a full investigation into one of our clients:

HMRC sent a long letter requesting detailed information on the accounts in question to an engineering company.

It’s worth stating now that we were surprised that HMRC had selected this client. They have the best, tidiest and most complete records we encounter. The Directors are extremely conscientious and would worry about minor accounting mistakes, never mind ‘fiddling’.

From cradle to grave, the Enquiry lasted 15 months: 12 of which were very tense for the Directors. One of them recently described the experience as ‘being in Guantanamo Bay’. “We felt we were being treated as guilty until we had proved ourselves innocent”.

Without wishing to go through the process in detail, HMRC wanted detailed information regarding the accounts including access to computer records. They have sophisticated software that can ‘interrogate’ the accounting software to identify if/how it has been manipulated.

Before examining the business records, the Inspector requested a meeting with the directors ‘to get a better understanding of what the business was about’. Because we were happy that the records were robust, the client was straight and we felt a meeting would assist our case rather than hinder it, we agreed - subject to the provision of an agenda. The Inspector said he had no such thing; he just wanted a ‘general discussion’.

On the allotted day, he arrived with a colleague and surprisingly, a script of questions. At that point, we should have stopped the meeting and sent him away until we had reviewed the agenda and had time to consider it. We didn’t. We’re reasonable: he was not. We will not be so again.

The meeting progressed. It probably took a couple of hours. It became apparent that the investigation had started because he thought that the business sold scrap which may not have been declared. He asked about private expenditure which is not relevant to a company enquiry and should not be part of a company enquiry.

The Inspector’s line of questioning became increasingly invasive, prying into the possibility of ex-wives and mistresses and indeed any possible place where non existent scrap sales might be spent.

By the end of the meeting the Director was totally drained (as were we) and it was agreed that there was no way we could subject the Director’s wife to such an ordeal.

Subsequently, having examined the records and ‘obtained a picture of how the business works’ the Inspector went out of his way to deliberately conclude that the accounts were incorrect. His rationale was:

• They issued credit notes
• There was little in the way of scrap sales

This is known in Revenue speak as ‘breaking the records’. Had he succeeded, it would have allowed him unlimited access to the Directors’ personal financial information (ie endless nit-picking over minor items).

As it was, he threatened to use legal powers to obtain the private financial statements.

We resisted this as his case was nonexistent, but we had to make a formal complaint to get him to back off.

The case closed shortly after. The fees, which were covered by fee protection, were £4.5k.

The Inspector’s arguments that the records were sub-standard was laughable, but this points the way as to how things will go when this new business records check gets under way.

HMRC have more power than ever now and the lessons to be learned from our experience outlined above were:

• Don’t let the Inspector bend the rules
• Complain loudly if he steps out of line
• Make sure clients take out the insurance (so they can afford to fight back)
• Only the paranoid survive

And finally a word from the victims:

“It was an ENORMOUS support/relief to us that we knew we had taken out the fee protection. It just meant we had one less worry about counting how much it was costing us to have your help and that instead of being a great cost to us, you were only a great support.”

For more information please contact david@chrisduckett.co.uk

DUCKETT | 01432 370 572 | contact us