Info zone – When the inspector calls

Barry Rose and Jeff Bloom own and jointly manage the Rosebloom Hotel and Country Club in Yorkshire.

One day, the Inland Revenue contacted Bloom and arranged to visit the business premises the following week to review the PAYE records. The company accountant had been sacked four months earlier and hadn't been replaced, and Bloom had assumed responsibility for the accounts.

On the day of the visit, Bloom showed the two Revenue staff into the general office, introduced them to the member of staff who dealt with the ledgers and then left for a meeting. During the course of the day, the Revenue men had full access to the business records and many of the staff.

Bob Hobson, the gardener, who works mornings only, mentioned that he hadn't seen Mrs Rose or Mrs Bloom working at the country club since each had had her first child. The inspectors noted that the wives each received a salary of £15,000.

Bloom thought nothing more of the visit until a call two weeks later. The Revenue had launched a full inquiry into the company's corporation tax return for the year to 31 August 1999, and both directors' 1998-99 income tax returns, and wanted to see all books and records relating to that period. They also wanted a meeting with Rose and Bloom.

Following a telephone conversation with the inspector, Bloom learnt that the inquiry arose not only from the findings of the PAYE inspection, but also from an anonymous letter.

The Revenue was seeking large amounts of tax, interest and penalties. A tax investigations specialist was brought in to counter the assertions and, 10 months later, a settlement was reached - but the company had to pay £3,000 relating to tax due on sundry benefits to employees.

This case study is a work of fiction and consequently the names, characters and incidents portrayed in the article are fictitious. Any resemblance to actual persons, living or dead, events or localities is entirely coincidental.

What the experts advise

Brian Baker is the partner in charge of tax investigations in the UK for HLB Kidsons chartered accountants
Although inquiries by the Inland Revenue can be random, the vast majority are specifically targeted. The following matters often attract attention:
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* Information from third parties.
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* Incorrect or incomplete P11D forms.
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* Excessive salaries to directors' relatives.
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* Late returns.
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* Low margins.
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* Unusual or unexpected costs in the accounts.
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* Insufficient directors' remuneration to fund known lifestyle.
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* Overdrawn directors' loans.
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* Large provisions.

In the case in question, the sacked accountant had written to the Revenue, making accusations concerning directors' expenses and wives' salaries. The PAYE review and information provided by Hobson the gardener gave sufficient cause for the inquiry to be launched.

As it transpired, these concerns were unfounded, but were not refuted without significant time, cost and inconvenience. However, the inquiry may have been avoided by taking a few simple precautions:
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* The PAYE auditor should not have had access to the ill-informed accountant.
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* The expenses systems were disorganised, with the P11Ds (a return of expenses and benefits form) technically incorrect.
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* The company should have had a dispensation (an agreement with the Inland Revenue that certain expenses need not be included on P11D forms).
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* The items in the eventual settlement should have been included in a PAYE Settlement Agreement at the end of each tax year.

Be aware

The Inland Revenue need not give a reason for launching an inquiry - indeed, its internal guidance manuals recommend that no reason be given.

A small number are selected at random, so no one can be sure they won't be targeted.

If you are targeted, make sure you are represented by someone who knows the limit of the Revenue's powers. Inspectors are not always entitled to see the articles they ask for.

What the law says

Paragraph 24, Schedule 18 of the Finance Act 1998 allows the Inland Revenue to inquire into a company's tax return within, normally, 12 months of the filing date of that return. It may, by notice, require the company to produce such documents and information as it may reasonably require for the purposes of the inquiry.

Contacts

Brian Baker at HLB Kidsons 0121-631 2631
bbaker@kibham.hlbkidsons.co.uk
www.hlbkidsons.co.uk

Inland Revenue
www.inlandrevenue.gov.uk

Stationery Office

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