Why contractors can’t afford to ignore Section 29

Contractors may not have heard of it, but Section 29 of the Taxes Management Act (1970) allows HM Revenue & Customs to extend their enquiry period if a taxpayer has not handed over the full facts to its officials, preventing them from making a fully informed decision on the taxpayer’s affairs. 

How far the taxman can go back

The result, writes Martin Hesketh, managing director of Brookson, an accountancy firm specialising in contractor tax affairs, is that if officials make a “discovery” during a routine enquiry, HMRC are able to delve into a taxpayer’s past even though their default position is that they can only go back one year. This is not a new piece of legislation, but it has won headlines of late because the Court of Appeal reaffirmed the taxman’s right to use it where he can meet certain tests.

Moreover, given the pressure on Her Majesty’s Treasury and the Revenue to collect more tax revenue, it would be unsurprising if HMRC start to use more of its powers, including the long-established ones, to achieve this.

Section 29 – who’s the target?

In our experience, these powers are very rarely used by HMRC in relation to contractors and freelancers, however. They are more often used if an individual or business has complex tax affairs or has implemented a tax avoidance scheme where there is significant tax at stake.

That said, we have recently seen HMRC target doctors, dentists, plumbers and those with overseas income (potentially including contractors), by giving them the opportunity to come forward and settle up at the lower end of the penalty regime. The next steps could be for HMRC to approach those who they are aware have undisclosed income to make their “discovery”.

Fully disclose to cap the enquiry period

It is therefore important that contractors ensure that they have made full disclosure of all relevant information to HMRC to protect them from the potential for its officials to extend their enquiries beyond the usual one-year period. 

The arising question, then, is what is full disclosure? This is not clearly definable, but a good tip is to ensure that when you file your company or personal tax returns you ensure that you take time to review the entries to ensure that your accountant has interpreted the information you have provided them with correctly, and that you have not inadvertently omitted to include all of your income. So double-check items such as bank interest or investment income, such as earnings from rented property.  If you have any doubts or queries discuss this with your accountant before approving the documents for submission.

High-net-worth individuals are at risk

As stated, this is not a new piece of legislation and we would expect HMRC to use it more when dealing with large corporations or high-net-worth individuals. It is, however, one of the many reasons to ensure that you complete you tax returns correctly (- the deadline for tax returns for the year ending April 5^th 2011 is January 31^st 2012). The easiest way to ensure peace of mind is to make sure that your accountant specialises in contractor specific issues and that you take time to approve the documents they prepare for you.