The final verdict
At the end of most full investigations, the business being investigated admits that additional profits were made. This means additional tax, interest and penalties must be paid, generally relating to profits made over the past six years or, if more recent, since the business started.
Certain procedures have to be followed in order to ascertain the amount owed, even when a disclosure of tax irregularities has been made voluntarily, or when the Inland Revenue has clear evidence of irregularities.
The Revenue will carry out computations to calculate the turnover of your business. Entries in diaries, materials purchased, heat and light costs, even water costs, may all be part of a grand arithmetical exercise that aims to prove you understated takings.
The Revenue will also calculate whether your known income is sufficient to cover expenditure. It will be contended that a shortfall means monies are being extracted from the business.
These exercises may look impressive on paper, but are not necessarily correct and must be checked. They include estimates and assumptions, and relevant factors may be omitted. Arithmetical errors do happen.
Also, the Revenue may purposefully over-estimate in its initial calculations. It will expect you to attempt to reduce the calculations through negotiation.
Once the amount of tax owed is agreed between you and the taxman, interest is added. This is calculated at commercial rates from the date the additional tax was originally due.
The penalty enforced is usually tax-related and can be as much as the tax paid. There are mitigating circumstances, however. If you disclose the mistake, there is a 20% reduction. If you co-operate with the inspector, there is a 40% reduction.
If negotiations fail, the Revenue and the proprietor both have the right to take the case to the General Commissioners (and subsequently the courts if necessary). The onus is on the proprietor to disprove Revenue assessments - you are guilty unless you can prove your innocence.
The General Commissioners is an independent body, usually consisting of local business people. Think carefully before appealing to the General Commissioners - it costs time and money. As investigation matters are rarely black and white, its decisions tend to be somewhere between the Revenue's figures and the proprietor's.
Before the investigation ends you will have to sign a statement of assets and a Certificate of Disclosure. The statement of assets lists all business and private assets and liabilities at a given date. It may be used against you in the future if it is discovered that some assets were not declared. A Certificate of Disclosure is a signed statement to the Revenue that everything is now in order and declared. Should this subsequently prove incorrect you may be prosecuted, and even face prison.
You will also be required to sign a "letter of offer" - a binding legal contract that lays down the tax, interest, and penalty incurred. It may allow you some time to pay up. Settlements over two to five years are not unusual, but may incur interest charges.
Once the letter of offer is signed and accepted, you will be expected to bring your tax affairs up to date. Some proprietors believe that once they have been investigated they will be safe - at least for a few years. This is not so. The taxman does not go away - some companies are investigated up to four times. The more investigations, the higher the penalties.
If you wish to discuss an Inland Revenue problem, you can ring Chris Lockett at no cost and in confidence on 01159 353535.
