Tax inspections and enquiries

According to published procedures, VAT and PAYE inspections can routinely be expected every two years. PAYE inspections go deeply into the records of the business to discover any untaxed benefits being given to directors, staff or subcontractors including private use within company costs. They can be expected to check entries in directors loan accounts. They also carefully check the status of subcontractors and may assess these for national insurance liabilities. See Employment status - general and Employment status - IR35, the same rules, in fact, apply to all employment/subcontractor situations.

Annual accounts and Corporation Tax returns may be subject to HM Revenue & Customs in depth enquiries. Discoveries in one year will lead to action to assess tax and national insurance in at least the past six years. Penalties (now expected to be about 50% of tax) and powers of inspection at taxpayers premises were increased in the 2008 budget.

Personal tax returns, SA100's:
According to H M Revenue & Customs statistics an enquiry can be expected once or twice in a working lifetime. This becomes more likely when returns are filed after the normal due date or where there are significant differences between tax years; this can lead to the return being selected by their computer program. Unsupported claims and private use allocations may not be agreed and any adjustments found, including for undeclared income, are likely to be extended back over six or more years, where appropriate, and be subject to tax, class 4 national insurance where applicable, plus penalties and interest. Penalties (now expected to be about 50% of tax) and powers of inspection at taxpayers premises were increased in the 2008 budget. The enquiry window, for returns filed on time, runs to one year after filing the return. Tax enquiries are expensive and distressing, even when they result in no adjustments. Historically there have been a large number of enquiries opened in the November to January period. Your costs in defending an enquiry are not deductable for tax purposes.

This is an adversarial process. You need to have legal-style evidence. General argument will have some significance but will not influence the Inspector by very much in his proposals for adjustments.

See client book-keeping guide for basic self-protection measures (pdf 370kb in a new window)

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