15 things they don’t want you to know

The official line of HMRC is that Self Assessment is easy. This is not true.

Not only is tax extremely complicated, but laws change every year. The truth is that tax is taxing, even if your return is small there are still vast areas of grey to get swallowed up in.

In January 2008 the face of HMRC Adam Hart-Davis admitted that the tax system was much too complicated, especially for the self-employed.

In response HMRC said, “We will not be using Mr Hart-Davis in any self-assessment advertising campaigns in the future.”

Read the story here and the BBC intervew is below.

HMRC don’t read you return: it’s their policy. This is the official line: “Since the introduction of Self Assessment in 1997 there has been a policy to process now and check later This has been clear policy from the inception of SA.”

On the Self Assessment form there is an ‘additional information box’ which nobody reads. You have got to ask, why provide an ‘additional information’ box if it’s not read?

Only a very small percentage of investigations are random, so if you are picked the chances are that you’ve done something to attract the attention of HMRC.

This may be that your income is dramatically up and down or that returns are always late, or that you are claiming excessively high expenses in proportion with your income – all these things can make you high risk in the eyes of HMRC. It’s like you are jumping up and down screaming, “pick me, pick me”.

In the event of a Self Assessment investigation being opened the burden of proof is on you. In short, you are guilty unless you can prove otherwise.

So let’s say that four years ago your mother gave you a cheque for £100 on your birthday and you put that into a personal account. HMRC will search out that account and ask you to prove where that cheque came from – they will most likely want to see a statement from your mother’s bank account confirming the cash was a gift.

And what if you can’t do this? What if you can’t remember where the cheque came from? What if your mother has not kept her statements? Well, the probability will be that HMRC will consider that amount to be undeclared income, as a consequence you will not only be taxed on it but you will also have to pay interest and penalties too.

When tax inspectors open a case they look at your expenses and say, “That’s not allowable, that needs to be reduced to 80 percent. And do you get personal enjoyment from this? OK well we will have to reduce that…” When your expenses are eroded your profits shoot up – et voila – HMRC gets a result.

In my case I put in expenses of just under £4,000. Every item was questioned from newspapers and magazines (valid research for a journalist) to my office rent. After a year I was told I’d be allowed just £1,000 of that figure – an unrealistic reduction. I dug my heels in and stuck to my guns; the figure went up to £2,500 and then to £3,000.

Stephen Camm* former Inland Revenue investigator and now head of tax investigations at Price Waterhouse Coopers says this is typical. “In investigative cases there has always been a strong element of negotiation, and it’s likely that the officer saw the offer of £1,000 as a starting figure. Tax investigations are like sport, you need to know the rules: if you play Lacrosse without knowing the basics you are going to get hurt.”

On AccountingWeb accountant Louise says, “I have a friend who recently told me about an investigation she had a few years ago… An inspector had claimed that deductions for motoring were too high, and that a proportion of the expenses for their van should have been disallowed as private.

“My friend and her husband were running a cleaning business, and had a van for work, and a car for private use, so they didn’t use the van for private purposes as it was always full of cleaning materials, buckets, ladders etc. Despite having always employed a qualified accountant, he advised them to just agree to the inspectors demands… as it would be easier all round, and she was unwell at the time so didn’t need the added hassle of taking on her accountant as well as the tax man.

“Unfortunately, by the time the inspector had gone back 6 years, added penalties, interest and the like, they had to re-mortgage their home to pay the final demand. All because they received poor advice – after all, if the van really was 100% business use, which she is adamant that it was, they should have stuck to their guns.”**

*This quote is taken from Nick Morgan’s interview with Stephen Camm for The Sunday Times

** This anecdote comes from Accounting Web and can be read in it’s original context here.

HMRC say that they judge every case on its own merits. That may sound sweet but it’s actually a huge pain: it’s expensive and it’s time consuming.

Let’s say there are two freelance journalists, writing an identical number of articles for identical markets. They have claimed buying newspapers and magazines as expense – and rightly so.

In an investigation it’s the job of the Inspector to reduce those expenses. They may well argue that some personal enjoyment was gained from reading the paper, or that they might buy a paper anyway, even if they weren’t journalists or even that the journalists wrote features so the news elements of the paper were not relevant!

One journalist might cave-in and accept an adjustment in his expenses for personal use (victory for the Inspector kerr-ching) while the other may stand up for what what is common sense, insisting that he be allowed to claim the full amount.

So – and this is really common – two people with identical work and expenses can be treated and taxed completely differently.

When HMRC say that they judge every case on its own merits, what they actually mean is that they will get whatever they can from whoever they can whenever they can

The Daily Mail says, “Tax inspectors are being offered bonuses of up to £2,000 to squeeze more money out of tax payers. They can earn up to an extra three per cent of their salary if they track down more unpaid tax.” Read more here.

Under the 1998 Data Protection Act you have the right to see papers in your file. This may include HMRC reviews and notes of telephone calls and emails which will give you an idea of how strong HMRC think their case is and how long they think the investigation will continue.

Email gail.taylor@hmrc.gsi.gov.uk with your request or see more details here.

I was extremely successful and saw the bulk of my file which was a real eye-opener. Others have had no more than a few pages back that have told them nothing. HMRC says, “The law allows us to withhold information, for example, where release would be likely to prejudice the assessment or collection of any tax or duty.”

You can also use the 2000 Freedom of Information Act to find out how HMRC operates. Information on FoI requests is here and you can email your request directly to michael.armstrong@hmrc.gsi.gov.uk

Be warned requests for both FoI and and Data Protection information are likely to be protracted and possibly even ‘lost’ too. Keep records of everything you have requested and make a note in your diary of when the records are due – HMRC have 40 days to process Data Protection requests.

After months and sometimes even years of negotiation HMRC will present you with a settlement figure. The impulse for the tax payer will be to sign and bring the ordeal to an end.

This figure – unfortunately – is not what it appears to be, it’s the tip of an iceberg: if you agree to it you will find yourself slipping into some very icy water.

HMRC will take (or “scale”) that figure back over (at least) five years (making the assumption that what you have done in one year you have done in others) they will then add penalties and interest.

In short you will end up being given a final bill which is much bigger than you anticipated.

HMRC publish the manuals issued to investigating officers – this is in line with the Code of Practice on Access to Government Information.

The Enquiry Manual is here and a full list of other manuals is here.

Be warned: HMRC don’t disclose information unless they have to, you can see a cracking example here.

Also, these really are manuals and they can be a very dull (and technical) read. There are however some fabulous pieces of information and it’s well worth persevering. This – for example – is interesting, EM2001 – Working an Enquiry: Reviewing Earlier Years: Introduction states, “It is not effective use of your time to be pursuing cases involving small amounts into earlier years.” I bet that there are quite a few investigators who have forgotten that line!

HMRC don’t like using email and don’t publish individual email address on their headed paper, indeed finding out their first names can be a tricky business!

Since The Sunday Times article (Internet war declared on ‘bullying’ taxman) there has been a lot of interest in how to contact HMRC using mailing lists.

The article – I felt – made me sound a bit fanatical, like I spent day after day after day emailing HMRC, when all you need to do is create a list and – bang – you can email thousands of people in a heartbeat.

Email: once you know the full name of the individual it’s straightforward to work out the email address: its normally firstname.secondname@hmrc.gsi.gov.uk so Permanent Secretary for Tax Dave Hartnett can be mailed as dave.hartnett@hmrc.gsi.gov.uk. You can get the directors’ names here. There is a list of the leaders of the four main HMRC groups here. I got my list by going to the above and then after that going to Google and searching for “@hmrc.gsi.gov.uk” you can see and copy my list here. HMRC seem to have no way of blocking these emails.

FAX: I haven’t used fax numbers, but if you have the software, the time to load all the numbers into a logging programme and free calls after 6pm I’m sure it would be an effective way of letting HMRC officers know about injustice within their profession. You can download HMRC fax numbers in an xls document here.

Yes, it’s one rule for you and another for them.

When you are investigated HMRC want to see every single taxi receipt, train and bus ticket claimed as an expense. However in the unlikely event that a celebrity, a Royal, an MP or a HMRC employee is the subject of an investigation HMRC does not require the same vigourous level of documentation.

Indeed in many cases HMRC will simply take the word of the individual that what they say is correct.

The Telegraph reports, “Each MP claims an average of £135,850 a year in expenses – a total of £87.6 million. They only have to produce receipts for items of more than £250.” Sweet deal!

As for HMRC themselves, well Clive Gawthorpe, a UHY Hacker Young partner, says: “Accountants who frequently face challenges over expenses for as little as £10 will find it ironic that HMRC runs such a liberal ‘no questions asked’ system for its own employees.”

Celebrities, Royals and MPs also enjoy a greater layer of security under a ‘two tier’ system. This suggests that the security they offer everybody else is – err – not that secure. See The Times HMRC sets up secret tax system for society elite.

The latest published staff survey (spring 2009) has been renamed “The Employee Engagement Survey” and been buried deep in the HMRC website – cheeky!

You can see why HMRC have tried to hide the results when you read the report.

To the statement “HMRC as a whole is well managed” only 11 percent gave a positive response! The same low number said they had confidence in senior civil servants in HMRC.

Just one in four people (25 percent) agreed to the statement, “I am proud to work for HMRC”.

The most shocking figures reveal a culture of bullying and discrimination at HMRC: 84 percent of employees say they, “Have experienced discrimination, harassment or bullying at work in the last 12 months.”

Most people being investigated by HMRC feel bullied and intimidated. I hope it’s of some small comfort to know that staff at HMRC spend a lot of time honing their skills on each other.

You can see the PDF file of the survey here.

The National Audit Office estimated that a third of all Self Assessment returns we give in are are incorrect and that’s not surprising when you consider that a recent Civil Service Capability Review admitted one in four of us contacting HMRC for advice is given, “incomplete or inaccurate information.”

One in four! That’s a phenomenal figure for failure!

The system is so complicated they can’t even get it right themselves. But here is the thing: when they get it wrong there is no comeback, when you get it wrong – well, then you are hammered!

There has always been a difference between tax ‘avoidance’ and tax ‘evasion’. Until now you’ve probably thought of avoidance as legal tax planning and of evasion as something ending in court. Unfortunately, HMRC is making the distinction more and more blurred.

Tax expert Ken Frost of www.hmrcisshite.com says, “Tax avoidance (reducing your taxable income by making use of your legitimate allowances, is legal so there is nothing wrong with tax avoidance! It is tax evasion (hiding taxable income) that is illegal. We all practice tax avoidance by the very fact that we use personal allowances, ISA’s, tax credits etc.”