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Like vampires and werewolves, the taxman is feared by the contractor community. He stalks company paper trails and changes from helpful advisor to rampant beastie given the faintest sniff of irregularity. But unlike the mythical creatures, the taxman cannot be assuaged by garlic or silver bullets – though some might like to try. There is little you can do to stop the taxman coming if you're on the target list and many Revenue & Customs audits are triggered at random or by small mistakes in documentation. It is broadly two per cent of self-assessment returns that are investigated each year, says Simon Dolan, managing director of chartered accountant SJD Accountancy. These are mostly resolved given a few letters and almost always come to nothing, he explains. And the two per cent figure is confirmed by Angela Brooks-Wong, director, British Taxpayers Federation, a non-profit making independent tax advisor. Though she believes this figure is set to escalate. Of particular interest to contractors is that "offshore accounts, will flag an investigation from now on," she says. It's a move that's expected to yield billions in unpaid taxes; anybody who is running an offshore account, or who has run one in the past, will face the tax inspectors. It's not surprising inspections are feared when the rules are so fluid. It's not just offshore accounts that are set to fall under the gaze of the HMRC's lidless eyes: Dolan expects contractors operating under composite companies will soon face a clamp down on what is perceived as a structure of convenience. Triggering an inspection has never been so easy, and while there are some obvious flags, HM Revenue & Customs is cagey about exact methods. "They shroud the whole thing in mystery," says Dolan, adding that he believes the tax authority runs an automatic software system to discover irregularities. And yet he suggests there may be a correlation between the reputation of the accountant used and the likelihood of investigation. "I've no figures to back it up but, from a human nature point of view, it makes sense," he says, suggesting HMRC picks on the weakest accountants. The idea is dismissed by Brooks-Wong. The accountant's reputation matters, "not one jot," she says. The top four can make just as much a mess of it as the semi-retired lone practitioner. Yet it is an idea perpetuated by contractors: "I think you'll find that the [former] IR won't investigate if you have a reputable accountant doing your tax for you," says Blaster Bates, an IT contractor writing anonymously on the Contractor UK Bulletin Board. HM Revenue & Customs were unable to comment on the issue at time of writing, yet such silence on the complexities of enforcement simply stokes contractors’ fears, and misinformation is rife. "If you get selected for [a tax] investigation, each little mistake is subject to a minimum £1000 penalty, for example a receipt that can't be justified," says Bates. This is incorrect. According to Brooks-Wong, penalties can only be levied up to a maximum of 100% of the tax due, and that figure can be reduced through cooperation, full disclosure and depending on the gravity of the irregularity. The tax due may not be the real figure, however, she explains. If HMRC decide an individual owes money, they assume the same amount was missed every year the activities have been taking place. So a £1000 underpayment in 2003 can result in an assumed £1000 underpayment for each year in a twenty-year period. It's up to the individual to disprove the assumption. Twenty years is the maximum roll back for fraud or negligence, it's six years otherwise, she explains. The trouble is, "negligence" is such an amorphous concept. This is perhaps where Bates' punitive ideas come from, but despite the pointy teeth HMRC seem to display, Dolan believes the chances of an investigation remain "extremely low." "Consider insurance, it's very cheap," he says. Even so, Brooks-Wong believes “you’ve to get up pretty early in the morning to beat the Revenue," and the systems and strategies some IT contractors have adopted in the last few years are suspect. Accountants and financial advisors do not end up paying the penalties, she says, and their sales pitches, and schemes, can be very attractive to high-earning contractors seeking to protect their earnings. It's certainly difficult to know which ‘solutions provider’ to trust, but if all else fails and you find yourself under HMRC scrutiny, just remember, a garlic-breath-type of approach is more likely to irritate than protect. William Knight Sep 13, 2006 Email this article Printer friendly page Previous Page
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