How a HMRC investigation can be – a horror story

Running Tax Hell I get to hear a lot of horror stories. Generally they start with an individual being investigated and it all seems fine – because they’ve got nothing to hide. After a year things start to wobble and then lives are made miserable.

In the new ebook Tax Investigation, what HMRC Don’t Want You To Know (to be published later this year) I’m writing a chapter that is inspired by all the horror stories that I’ve listened to. Here is a draft.

How will we get along?

Here’s an outline of how a typical compliance check can run if you are unrepresented or poorly represented. It’s the nightmare scenario.

The first you know about the investigation is with a standard letter saying that HMRC are looking into your tax return. They will request documents, there’s a strong chance they will ask for documents they are not entitled to see, such as personal bank statements.

You’ll then be invited in for a meeting where you will say, ‘What is this all about? What are you investigating?’ HMRC will be reluctant to give that information. They may well tell you they carry out random enquiries and this could be one of those. The investigation is extremely unlikely to be random.

HMRC will do their best to put you at your ease and you’ll be surprised at how general the questions are, everything from ‘Do you smoke?’ and ‘What take-outs do you eat?’ to ‘Where do you go on holiday?’ They might ask you to fill out a lifestyle questionnaire – which might seem innocuous enough.

Then they’ll look at your expenses and ask if you take any pleasure from expenses you have claimed. ‘This is a strange question’ you might think. And you might find yourself saying, “Well I enjoy my work, so yes I guess I get pleasure from some of these things.”

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They’ll then ask for more documents and you think that if you give them everything they ask for, then that will be the end of it, but the more you give the more they ask for.

Then you will start to understand that HMRC are using language in a very different way to you. According to HMRC this is ‘a check’ and you are ‘a customer’. But you are clearly not – you a suspect in an investigation.

Other words that are confused include ‘carelessness’ which is not a word that infers much in the way of seriousness in the real world, but in HMRC speak the word is equated with negligence, so is much more serious. Also when HMRC say that they believe a ‘deliberate inaccuracy’ has taken place what they actually mean is fraud. Again, this is more HMRC speak so it’s not apparent of what HMRC are accusing you of.

After about a year you will start to see you’ve been lulled into a false sense of security. It’s about then that those lifestyle questions you were asked will come back to bite you.

HMRC were building up a picture of your outgoings, so when you say that you have take-out twice a week and you spend about £10 on each that’s £20 x 52 – that’s over £1k on take-outs alone. They’ll add up all the other expenses too. Then they will turn around and say your declared earnings are ‘X’ but your outgoings are ‘XX’.

They want to ‘prove’ that your outgoings are higher you’re your declared income and that’s actually all they need to do to slap you with a tax bill plus penalties, plus interest.

They don’t actually need any other evidence at all.

Next up will be those expenses you said gave you pleasure – big mistake! Now HMRC will say a proportion of those expenses have to be deducted for personal use.

Lower expenses will increase your profit – so suddenly there is more tax to pay. And on top of that tax comes penalties and interest and HMRC will also ‘scale back’ their findings – perhaps over five years.

Scaling back is an assumption that what has happened in the year of the investigation has also happened in past years – so whatever figure they come to they just times by five (adding interest and penalties).

It might be around this time that you come across ‘Force of Personality’. This is another piece of HMRC speak that simply means bullying.

If you have good representation HMRC bullying should be nipped the bud but if you are unrepresented (or poorly represented) you need to be extremely cautious.

The so-called force of personality is demanding personal statements when HMRC have not right to have them, it’s claiming HMRC have damning evidence when they have none, it’s keeping an unrepresented taxpayer in an interview room for hours on end and bombarding them with questions in the hope they will break.

When you hear somebody from HMRC saying that they are going to shake a tree and see what falls out there is a good chance that bulling is their strategy. What they are saying is that they have no evidence (they don’t know what is in the tree) but they think if they shake it hard enough (bully) they will get a result.

Former special investigator Alan Kennedy says he was regularly told to use ‘Force of Personality’ to get results and he did not hesitate. He says, “We got away with murder… people broke down in tears and it didn’t bother me a jot, secretly I was quite pleased.”

So – going back to the title: how will you get along?

If you are unrepresented and naïve you’ll feel puzzled, but you’ll be lulled into a false sense of security: It’s just an enquiry, could be random, they just want to know how many times I go out for a drink on a week. What’s the fuss?

But after a year you will start to see a very different picture. HMRC can be bullying and even with no substantial evidence they may hit you with a hefty tax bill – at that point it will be too late for take-backs.

I’ll finish off with this with a 5 Live first person account.

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