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Blog posts in Tax problems and investigations

What to expect if HMRC decides to investigate your business

June 05, 2014 by Tax Donut contributor

Auditor{{}}Her Majesty’s Revenue and Customs (HMRC) can use its powers to conduct investigations or charge penalties and interest on amounts outstanding.

If it requires more information, a letter or notice will be issued detailing what HMRC needs and which tax it refers to. If an investigation is to be carried out, you should be notified in advance by letter or telephone.

If VAT or excise duty records are to be inspected, a phone call will usually be made to inform you. If you are unsure about the type of tax that is involved, you should contact HMRC and ask.

You will normally be informed of an intended visit, including the day and time that officers from HMRC will be attending. However, it is possible that an unannounced visit could be made and officers will ask to see documents.

Requests for information and your rights

If an HMRC officer requests information and you are unsure of the reason why, you can ask for an explanation. If you are unhappy with the reason given and believe the information to be irrelevant to the investigation, you can say so and refuse to provide the data to officers.

However, if HMRC officers consider the information required to be relevant to enquiries, they can use powers to formally request it.

Officers should explain which type of duty, tax or tax credit they are enquiring about before a review or inspection. However, if they discover information during the assessment that may be relevant to another tax department, it will be passed on to that department.

Can officers inspect more than one type of tax or duty?

Officers will notify you in advance that they intend to inspect records for a specified tax. It is up to you whether you agree to this or not, so if you are approached by more than one office wanting to inspect records for various taxes or duties, you can refuse to give consent.

Your rights and the scope of HMRC powers can be confusing, which is why it is advisable to consult a professional if in any doubt.

• Blog provided by Karl Bilby of The Accountancy Partnership.

Further reading

Answers to key questions about tax penalties and fines

November 13, 2013 by Elaine Clark

Answers to key questions about tax penalties and fines{{}}What fines and penalties exist?

HMRC can impose hefty fines and penalties for a number of things, the main ones relevant to an individual or business are penalties for late submission of a tax return or late payment of tax due, for errors on returns, payments and paperwork and a failure to notify penalty when your circumstances have changed.

What if I am late filing my tax return or making my tax payment?

The penalties accordingly to the particular tax type, for example, if a corporation tax return is filed late, the penalty is £100, while a late self-assessment incurs a penalty of £100 for a day late up to £300 and 100% of the tax due after 12 months in serious cases. If you had problems when filing your tax return, HMRC will consider “reasonable excuses”, for example, a failure in a computer system or serious illness, but reasonable excuses do not include forgetting to do the return or not having time available to do it.

What happens if I make a mistake on my tax return?

If you understate or misrepresent the tax due on your tax returns, you can be fined – even if your excuse is that you were not aware of the tax laws. This is known as an “inaccuracy penalty. HMRC expects every individual or business to keep records to allow them to provide an accurate return. Where an individual or business is uncertain over tax affairs, HMRC expects them to check with their accountant to confirm the correct position.

HMRC will charge a penalty where there has been a lack of “reasonable care” in the preparation of the return, incorrect information has been intentionally submitted or the return was deliberately wrong and information has been concealed.

The penalties due are based on the reason for the error and the amount of tax lost. The following are the guidelines for the level of penalties:

  • Between 0% and 30% of the extra tax due to lack of reasonable care.
  • Between 20% and 70%of the extra tax due for a deliberate error.
  • Between 30% and 70% of the extra tax due for a deliberate and concealed error.

The penalties could be reduced if you tell HMRC about the errors, give them access to the figures and help them to work out the extra tax due. 

What if I forget to tell HMRC about a change in my circumstances?

You may be liable for a failure to notify penalty. For example, if you or your partner earn more than £50,000 and are receiving child benefit, you may need to have registered for self-assessment. Registering late for self-assessment (ie after 5 October) could result in a failure to notify penalty.

There are many things you must tell HMRC about, including:

  • Starting a new business.
  • If your business turnover has exceeded the VAT registration threshold (currently £79,000).
  • Selling an asset at a profit level where capital gain tax would be due.
  • A change in circumstances where a self-assessment tax return would need to be completed (eg child befit tax charge, rental income, untaxed income, etc).

The penalty due for failing to notify HMRC is a percentage of the tax (known as the “potential lost revenue” or PLR) that is unpaid on a specified date or the amount that the person is liable for the relevant period.

So, for example, if you failed to tell HMRC by 5 October 2013 about child benefit you received when you were earning more than £50,000, as long as you complete the 2012/13 self-assessment and pay any tax due by 31 January 2014, the failure to pay penalty will be nil (there is no tax lost and so any percentage penalty applied to a zero tax loss is nil) – which makes this a slightly barmy penalty in some cases.

What happens if you are using an accountant?

Even if you have appointed an accountant, you are still responsible for all tax returns, calculations and payments, although clearly any reputable accountant should be guiding you through the tax minefield and making sure you avoid any unnecessary fines and penalties.

Try to find an accountant who is a member of a professional body, such as the Institute of Chartered Accountants in England & Wales (ACA or FCA), Association of Chartered Certified Accountants (ACCA or FCCA), Institute of Chartered Accountants of Scotland (CA), Institute of Chartered Accountants in Ireland (ICAI), Chartered Institute of Management Accountants (ACMA or FCMA) or Association of Accounting Technicians (MAAT).

Where can I find more information about fines and penalties?

The best place is find all of the information on fines and penalties in one place is in the agents or accountants section of the HMRC website.

Using 20 years’ experience spent working at some of the UK’s leading businesses, award-winning chartered accountant Elaine Clark is the founder and managing director of, an online accounting service aimed at small businesses with big ambitions. Follow Elaine on Twitter at @cheapaccounting.

Further reading

Is the 'bedroom tax' disturbing your sleep?

October 23, 2013 by WisteriaFormations

Death and taxes, often cited as two certainties of life, and two subjects we like to ignore. Perhaps that’s why we know so little about tax, even though we pay it every month out of our wages. We may not know what happens after death, but we can muse upon what happens in life after tax.

The media plays a role in heightening the tension between those who pay tax, those who don’t and those who avoid it. The recent news on ‘bedroom tax’ only serves to demonstrate that tax is also a highly emotive subject, especially when tied with personal connections, such as our homes.

Is the ‘bedroom tax’ disturbing your sleep?

Is the 'bedroom tax' disturbing your sleep?/tax and question mark{{}}If you are living in a council or housing association property, with an extra bedroom or two, chances are it is.

A branch of the Welfare Reform Act 2012, the commonly named ‘bedroom tax’ enforces an “under-occupancy penalty” if tenants have more bedrooms than they require, which reduces housing benefit by 14% for an extra room and by 25% for two or more rooms.

Under the current criteria, all children under 10 are expected to share a room and children under 16 of the same gender are expected to share a room.

According to figures given to The Independent, 50,000 people are now facing eviction after the bedroom tax. Both council and housing association tenants are now falling into rent arrears after their benefits have been cut. In some cases, alternative housing cannot be found, so tenants are effectively trapped in a property that they can no longer afford.

Living in a vicious circle

The personal nature of the bedroom tax highlights that taxes aren’t just something we can disregard or forget about. We know taxes are inevitable, so the more knowledge we have about them and the impact they have on our personal lives the better.

The influence political parties have on tax is also worth noting, as taxes often change in line with the stance of the party. The Labour Party is now pledging to scrap the bedroom tax if they win the election in 2015. At the other end of the political spectrum, the Conservatives recently reduced the top rate of tax by 5%, from 50% to 45%, for the highest earners in the UK. Whether you agree or disagree with different taxes, they aren’t going away.

As you can see from the numerous examples, life after tax is complicated and continues to have a seemingly eternal life. If you’re worried about your individual tax contributions or those connected to your business, speak to a tax advisor, who can make life that little less, well, taxing.

Blog supplied by Andrew Millet of Wisteria Accounting.

What small-business owners need to know about tax enquiries

August 12, 2013 by Carl Elsby

What small-business owners need to know about tax enquiries/apple pie{{}}The government has tasked HMRC with raising an additional £7bn a year in tax revenue by tightening up procedures and introducing new initiatives. Unfortunately, with about half of the £35bn tax gap attributable to SMEs, the UK’s small businesses look likely to bear the brunt of the tax office’s attention.

So what measures are HMRC employing to meet their target?

Compliance officers

The tax office has recruited an additional 2,500 compliance officers, tasked with enquiring into taxpayers’ affairs from VAT through to Corporation Tax. Officers are authorised to use all HMRC’s powers.

Business Record Checks

An estimated 20,000 Business Record Checks (BRCs) will be carried out this year, looking at all aspects of financial practice. Specifically targeting SMEs, BRCs are either carried out remotely and/or by undertaking a visit to make sure that companies are keeping sufficient records.

HMRC taskforces

In total, 42 taskforces have been launched. These specialist teams visit traders to examine their records and carry out other investigations. Teams generally focus on high-risk sectors and specific geographical locations. For example, six taskforces set up in May 2012 looked at:

  • Indoor and outdoor markets in London
  • Taxi firms in Yorkshire and the East Midlands
  • Property rentals in East Anglia, London, Yorkshire and the North East
  • Restaurants in the Midlands

Tax amnesties

Historically, HMRC has operated a range of tax amnesties for specific groups. Amnesties usually have a time limit and so far have yielded £547m from voluntary disclosures. One of the most recent amnesties was the VAT Outstanding Returns campaign, which closed in February, targeting among others, small businesses and the self-employed.

The HMRC database

The tax office has a huge database containing information used for risk assessments and identifying taxpayers for investigation. Information supplied by a range of organisations such as the Land Registry is also used.

Centre closures

HMRC is also implementing measures to cut costs, such as the closure of all of its enquiry centres. However, this has given rise to doubts about HMRC’s ability to deal effectively with queries and to communicate constructively with businesses and individuals. Criticised by the Association of Chartered Certified Accountants, the move could be seen as withdrawing support and advice when people need it most.

Not only are smaller businesses a tax target, but they also lack the financial expertise available to larger organisations. The increase in tax enquiries makes it more important than ever to seek advice on tax planning and procedures from a well-informed accountancy partner. Irrespective of whether you place your tax affairs in the hands of a qualified accountant or go it alone, it’s clear that SMEs need to get their tax affairs in apple pie order.

Blog supplied by Carl Elsby, Managing Director of Elsby & Co

Why the government needs to get tough on all tax avoiders

June 22, 2012 by Frances Johnson

The headlines this week have of course been dominated by allegations that a number of celebrities are guilty of what has been described as “straightforward tax avoidance”.

An investigation by The Times alleges that high-profile figures, such as the comedian Jimmy Carr, and three members of the pop group Take That, have avoided paying the full rate of income tax by using an offshore tax scheme. The discovery provoked widespread outcry, with Prime Minister David Cameron singling out Mr Carr for heavy criticism. The Jersey based scheme, K2, is now under investigation by HM Revenue and Customs (HMRC).

This story will most certainly have raised the eyebrows of many small-business owners. Although plans to spot-check small businesses' tax records have been scaled back, HMRC has faced much criticism from business groups for taking a rather heavy-handed approach when it comes to SMEs. However, with tax avoidance schemes providing a loophole that has enabled some of the country’s top earners (and some of the UK’s biggest businesses) to avoid paying the 40% rate of income tax, a lack of consistency is apparent.

Although HMRC is seeking action over such tax avoidance schemes, it smacks of shutting the stable door once the horse has bolted. How has K2 been allowed to operate for so long – and how many similar schemes are out there?

Yesterday, Carr released a statement via Twitter in which he revealed that he ‘met with a financial adviser [who] said to me “Do you want to pay less tax? It’s totally legal.” I said “Yes”’. To be fair to Carr, I think most people would also answer ‘Yes’ to that question. After all, isn’t that why people seek financial advice – to minimise their tax liability?

Carr added: “Although I’ve been advised the K2 tax scheme is entirely legal, and has been fully disclosed to HMRC, I’m no longer involved in it and will in future conduct my financial affairs much more responsibly.” If HMRC knew of the scheme, why didn’t it act? And if Carr was advised to use this “legal” scheme, shouldn’t we address our questions to Mr Cameron rather than HMRC? Surely the onus lies on the government to change the law?

While many small businesses continue to struggle in a difficult economic climate, the government must ensure greater consistency. It’s not right for small businesses to be singled out. It’s time for the government to take action, and by action I mean clamping down on all culprits – not simply using one comedian as a scapegoat.

Why business and government must act to combat the UK's late-payment culture

April 26, 2012 by Gordon Skaljak

Gordon Skaljak of Graydon UK{{}}The late payment of trade invoices is threatening the profits, growth and survival prospects of small firms – but few use formal procedures to tackle the problem. These were the headline findings of a report Graydon UK published recently, in partnership with the Forum of Private Business.

Of the 500 UK small businesses we surveyed, 51% said late payment of trade invoices was a problem and 23% of these described it as a serious problem – while 16% said they have almost been put out of business as a result.

Highlighting the ‘domino effect’ of late payment down the supply chain, 56% of those respondents not paid on time have been forced to pay their own suppliers late. Furthermore, 45% said late payment has eroded their profits and 23% said it has undermined their ability to invest in growth through innovation.

Changing terms without consultation

Another problem is customers persisting in changing payment terms without consultation. 65% of respondents reported customers extending their payment terms without notice or consultation. 27% said suppliers had universally changed terms and conditions and a quarter said customers had withheld final payments – without consent – to first assess the quality of work. 14% reported customers demanding discounts for prompt payment not agreed at the outset and 12% said supplier credit had been withdrawn without notice.

Our research also shows that businesses with credit control procedures are significantly less likely to suffer as a result of late payment. However, only 44% employ formal credit control procedures, with 38% instead relying on a mix of formal and informal processes and 16% juggling payments on an ad-hoc basis.

Only a third of respondents offer prompt payment incentives, while just 30% use existing legislation to charge interest on overdue invoices and 40% use cashflow management software. Debt-collection agencies are employed by 42% of respondents; while 43% keep a reserve in the bank to offset late payments. Invoice discounting is seen as a solution by just 26% of businesses.

Understanding the risks

The current economic climate makes it more important than ever that businesses clearly understand the risks and opportunities associated with their operations. This includes identifying cashflow and other risks triggered by late payment of trade invoices.

Businesses cannot achieve sustainable growth if they aren’t paid on time. This is why having a formal credit management process based on reliable, accurate customer payment behaviour information is essential for businesses who want to transact with confidence and fulfill their sustainable growth potential. The business community and the government must join forces to stamp out the UK’s late payment culture.

Graydon is a credit-referencing agency specialising in company credit checking, credit reports and credit risk management services.

Personal indemnity

December 16, 2011 by Tara West

James, 46, spoke to ConstuctaQuote, an online insurance quote comparison website, about why he believes Professional Indemnity (PI) insurance is an essential purchase for businesses. 

Tell me about your company?

I secured my dream job as an advertising consultant around ten years ago, and after three years of learning, I decided to set up my own small agency in the heart of London. Half my business specialises in digital advertising and the other half concentrates on editing.

Have you experienced any risks when running your company?

As an owner of a small business, every day is a risk, especially in such financially uncertain times. From securing new clients to maintaining current ones, every day is a challenge. Since starting up my small business, I try and take very few risks in my line of work and I do this by making sure everything I do is honest and legally protected. 

What did PI insurance mean to you when you first set up your business?

I have always been told that if something is to go wrong it will do, and so, with this in mind, I saw PI insurance as a way of protecting my business against future risks.

What benefits does PI cover provide for advertising consultants?

As digital advertising consultants, PI cover is crucial for protecting our business against the risk that comes from working with clients who could file for professional error. Obviously, the level of PI cover will change depending on each project and client but it is extremely beneficial in each case, and gives you that peace of mind.

What areas of your company are most at risk?

As a business, you are always at risk. In my industry there are many risks around contracts and the work that we produce. If a client feels we have not stuck to the contract agreed for a particular campaign or damaged their brand through poor advertising, then of course, the client could sue for damages.

What is the most fascinating negligence claim you've heard of in your industry?

One of the most fascinating negligence claim cases I have ever heard of was when an advertising consultant inserted an incorrect phone number in a print and digital advert that went viral.

The result was catastrophic, with sales plummeting and brand image damaged. The consultant’s client then filed and won a claim based upon loss of income and damage to brand image. But it wasn’t all bad news for the client, as the prices of the claim were covered under the consultant’s PI cover. So, in this individual case, it really paid for the client to insure themselves from this potential risk.

This blog has been provided by ConstructaQuote, an online insurance quote comparison website dedicated to the SME market.

New Sectors Targeted By Taxman

November 16, 2011 by Harwood Hutton

In a bid to claw back £7bn annually in undeclared tax for the Government, Her Majesty’s Revenue and Customs (HMRC) has added landlords in Wales, scrap metal dealers in Scotland and builders in the North West to its list of sectors to target.

Previous campaigns have seen dentists, restaurateurs and, most recently, second homeowners put under the microscope.

Under this latest campaign, the taxman will be seeking out scrap metal dealers who appear to be suppressing their income or inflating their expenditure in a bid to avoid tax.

David Gauke, Exchequer Secretary to the Treasury, said in a statement: “We will not tolerate those who break the rules. The taskforce will come down hard on scrap metal dealers and their customers or suppliers who have chosen to break the rules or deliberately evade the tax they should be paying.”

Taxpayers failing to submit their tax returns in the South East of England will be targeted, as will landlords owning three or more properties but not paying enough tax in the North West of England or North Wales.

The taxman will flood a particular sector in short bursts with agents to ensure that tax is being paid.

It was also announced yesterday that taxpayers who do not submit their statutory returns across Corporation Tax, Income Tax, Self-Assessment, PAYE and VAT will be targeted.

Darren Boston, SME Business Unit Head for HMRC in South East England, said: “The taskforce will come down hard and fast on those who have chosen to break the rules and deliberately evade the taxes they should be paying but not submitting their returns.

Whilst business activities may have ceased in some cases, or there may in fact be no tax liability, HMRC will target those who are fully aware how much money they are due to pay but have made the conscious decision not to submit the necessary declarations,” he added.

This post was first published on 8 November 2011 by Harwood Hutton.
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Background checks - how to check if your clients and customers are financially sound

November 10, 2011 by Anita Brook

Business meeting{{}}If you are a business that offers credit to customers you need to do what you can to ensure they have a good credit history and will pay you on time, every time. You could save yourself a lot of time and worry in the future by spending a little time researching them at the start of your working relationship.

Ways you can check a new customer’s credit history include:

  • Information – Collect the right contact information from the start, including a named person in accounts, where possible.
  • Research - Investigate the company, meet people, visit the premises they trade from and get a feel for how they do business. Also, with the internet you have the opportunity to research what others say about them.
  • Contact suppliers you have in common – Ask trusted suppliers and customers about them to see what experience they have had with them whilst doing business.
  • Bank credit checks – Some banks will carry out business credit checks for you for a small charge – you just have to ask.
  • Checking software – Various specialist software tools on the market enable you to run credit checks on new clients before entering into a contract with them.
  • Use specialist websites – You can check a business’s credit history online by using websites such as

If you really want to do business with a new client, but the research and information you have collected doesn’t put a good light on them paying on time, you always have the option of asking for advance payment.

Anita Brook is a chartered accountant and owner of accountancy firm Accounts Assist. She also help businesses regain control of their cash flow with Debts Assist and helps entrepreneurs launch their own bookkeeping businesses with Brilliant at Bookkeeping.

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