You're under investigation

Unlike Customs and Excise, which is able to employ very sophisticated methods of surveillance, the Inland Revenue conducts its investigations largely through correspondence and meetings.

However, it is likely that an inspector will secretly visit your business premises, probably posing as a customer, before you are even aware an investigation is under way.

The inspector will note opening times, price lists, how busy the premises are, special offers, competition, type and number of tills, and business records in sight. Observations made during this visit may be cross-checked with information given by you later in the investigation.

The inspector may also visit your private address and note any expensive cars, personalised number plates, or boats in the drive.

The Revenue will then write to inform you or your adviser about the investigation. It is obliged to enclose leaflet IR72, an explanatory leaflet about investigations, and a booklet entitled Code of Practice. This booklet explains the rules that the Revenue adheres to and your rights and responsibilities. You should study it closely.

The letter will ask you to answer set questions about the type of records kept, what work your adviser does, and whether there are any estimated or balancing figures in the accounts. The Revenue is also obliged to state why it is not satisfied with your accounts and/or tax returns. If this is not stated, you should ask.

In-depth scrutiny

In theory, you are given the chance at this stage to satisfy the Revenue's concerns. This rarely happens in practice. Usually, this letter is only the start of an in-depth investigation that will last from six months to two years - possibly as many as five years.

No matter what explanations are provided by you at this stage, the Revenue is likely only to reiterate its concerns.

Furthermore, the Revenue may not even let you know all its concerns. Other reasons may be cited for examining your accounts, while the real reason may be held in reserve until a future meeting with the inspector.

After you, or your adviser, has supplied answers to this letter, the Revenue will usually write back and request submission of all your business records for a minimum one-year period. It will also ask for all private bank and building society accounts.

The Revenue has the legal power to obtain these items and they should be supplied without delay. It is very important to co-operate - if the Revenue has to send reminders you may face more serious penalties if you are finally found guilty.

The Revenue will spend a lot of time examining your business records, paying particular attention to records of takings and expenditure. They will look closely to see whether drawings/remuneration is recorded as and when taken.

The aim is to discredit your business records. If this is done, then the accuracy of the accounts can be questioned. The non-recording of takings or drawings, or estimated figures, will lead the inspector to contend that the records are inadequate.

The chances of the inspector finding areas to query are high. The Revenue has the resources to devote a lot of time and expertise to record examination.

This initial correspondence is followed by an opening meeting, usually at the tax office. This is the single most important part of any investigation. The inspector will have prepared thoroughly and you and your adviser should do the same. n

Next week, Chris Lockett explains what happens in the crucial opening meeting of a tax investigation. If you wish to discuss an Inland Revenue problem, you can ring him in confidence on 01159 353535.