The essential first step to be taken by a small business in
regard to a tax inspection happens long before that small
business is advised a tax enquiry is about to take place.
That first step is to obtain and retain receipts and third
party evidence for every sale and purchase and maintain
accurate accounting records.
A solid system of bookkeeping accounts provides the basis
to defend any tax investigation. The fact that any
questions asked by the tax authority can be explained with
real financial paperwork has the effect of giving the tax
inspector confidence that the accounts and tax calculations
are accurate.
Despite the best intentions of a small business the tax
enquiry that small business faces is undoubtedly an
investigation between a businessman naïve in the thousands
of statutes and taxation regulations against a professional
tax inspector trained and experienced in where to find the
loopholes. The match is akin to a schoolboy football team
that has never played before taking on a professional side
of league status who train and play every day.
The difficulty most small business has to deal with is
apparently innocent questions from the tax inspector the
answers to which cost the tax payer money. The tax
inspector may ask numerous questions to which the tax payer
does not necessarily have to answer or agree to. The
solution is always to stick to the solid bookkeeping facts
as shown in the accounting records.
Under UK law there is no regulation stating that a tax
payer has to attend a meeting with the tax inspector.
Meetings with tax inspectors can result in many questions
being asked which increase the tax liability from lack of
knowledge of the tax rules and sheer frustration by the
small business to get the job done and over with. If called
to a meeting a professional tax advisor or experienced
accountant attending on behalf of the client or in place of
the client is undoubtedly a better option.
If the small business accepts a meeting with the tax
inspector it is important to prepare for the meeting
correctly. Such preparation would involve reviewing all
bookkeeping records prior to the meeting and arranging them
in a reasonable order, double checking the accounts do not
contain any obvious errors and also obtaining from the tax
inspector prior to the meeting a detailed note of all areas
to be discussed.
The tax inspector will often suggest a meeting at the
business premises or the tax payer home. The tax inspector
does not have a statutory right to enter the business
premises and can do so only by invitation or warrant. The
legislation regarding visits to business premises is to be
changed from 2009.
Tax inspectors are observant and on visiting the premises
will assimilate many areas to be investigated by simply
looking around or idle chat with members of staff. When a
tax inspector is invited to the home the general lifestyle
of the tax payer would be assessed in relation to the
profits declared.
There are many examples of how a tax inspection can
determine the validity of the accounting records. This list
is almost endless.
A visit to a public house might reveal catering sales which
had not been declared. A takeaway retail outlet may have a
large stock of cartons that subsequently could be checked
against purchases and sales. Notices on walls in a
reception area might indicate business success that would
produce an area to be looked into.
Of course the honest tax payer has nothing to hide but
nevertheless such visits can raise many awkward questions
that take up time and effort to explain. Many hours of work
can be spent producing evidence and discussions which could
lead to further difficulties even when there ii nothing to
hide.
When a tax inspector writes it is best not to ignore the
letters but to respond quickly and factually. Answer
questions directly and specifically without opening up
further areas for discussion. Ignoring correspondence or
avoiding questions leads to more problems than it is worth.
One feature of a tax investigation is to reach an area of
the inspection where there is disagreement between the tax
inspector and the business. In such circumstances the tax
inspector may propose a solution and that solution is often
not likely to be in the businesses best interests. When
such proposals are made the negotiation skills of the tax
payer or his advisor are paramount.
One area a tax inspector may make a suggestion is to adopt
a financial solution based upon a model set of financial
results. The business can agree to this proposal but does
not have to unless the tax inspector can show reasonable
deficiencies in the business financial records.
The tax inspector often ask questions when they have no
statutory right to the information unless volunteered by
the business. Questions may also be asked that are not
specific to the current investigation.
Information requests outside of the scope of the tax
investigation and personal records can be denied unless the
request is reasonable and relevant to the enquiry. Care
should be taken in casual conversations either before or
after meetings or phone calls as these are times when the
business or its staff may answer questions innocently but
remember that those innocent chats are with a professional
intent on examining every conceivable path to determine if
the maximum tax liability has been generated.
The conclusion to the best advice when the prospect of a
tax investigation is imminent is first of all to prepare
solid accounting records, always respond quickly and
specifically to the questions being raised. Keep the chats
and answers accurate, specific and short and sweet and to
the point.
If the business can afford it then engage a specialist firm
of tax advisors to negotiate on behalf of the business. The
best tax advisors are often either experienced tax
accountants or former revenue employees who know the rules
and can conduct the enquiry on behalf of the business in a
professional manner.
----------------------------------------------------
Terry Cartwright, accountant and CEO at DIY Accounting,
designs accounting software http://www.diyaccounting.co.uk/
on excel spreadsheets providing complete single and double
entry bookkeeping systems
http://www.diyaccounting.co.uk/bookkeeping.htm that
completes tax returns
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