According to the press, the number of new tax investigation cases has been increasing. The Revenue may be collecting more than ever from the taxpayer, which allows the Chancellor to deliver a more generous budget, but the incidence or people not paying their taxes seems to be on the rise.
As an expert accountant specialising in criminal and regulatory defence, many of my cases are centered around either tax evasion or corporate failure. Throughout my career as an expert accountant I have been amazed how common non-payment of tax is. Most of the companies I investigated on behalf of Companies Investigation Branch were being run on the basis of making cash payments to the “self-employed” workforce who did not declare the income (and were also claiming supplementary benefits).
It was cheaper for companies being investigated to pay less to their workers as self employed, than deducting tax and NIC from their wages. Such was the lack of respect for the regulatory system, that payroll documents recorded employee names that included Micky Mouse and Donald Duck!
The tax investigation work I take on these days tends to be a little more sophisticated. However, the principle is just the same. Tax has not been paid to such an extent that a criminal prosecution normally ensues. My job in such matters is to investigate corporate or personal affairs and calculate fair levels of taxable income. This then leads to an appropriate assessment of tax that has likely been underpaid. It is often the case that the actual income or profits are less than being assumed by HMRC.
A common problem arises when a tax payer has been a little remiss with his or her financial affairs. While they submit tax returns every year and pay some tax, they omit to declare some strand of income. This might be rental income from a property unexpectedly left to them in a will, or modest levels of cash takings within a business that somehow bypass the bank account ending up in the tax payer’s pocket. Often it might only be a small part of their total income. When the Revenue starts asking questions, it will not only look at the problematic issue that may have been omitted from the tax returns, but also at the rest of the historical financial activity.
This is where difficulties arise, not only does the hidden income need to be accurately determined, but also the previously disclosed profits and earnings need to be looked at again. HMRC might typically look back 10 years or more, 20 in some cases – much longer than most businesses and individuals keep their records! Legitimate earnings on which tax has been paid may be scrutinized, and profits that previously were accepted on the self assessment tax returns may require substantiation.
When assumptions are made by HMRC about levels of income you can bet they will be on the high side. It is only to be expected given the Revenue will expect a heated argument and wants to start any bargaining from a high point. A tax payer needs to be able to demonstrate with supporting documents any non taxable income (gifts and loans etc) and all expenditure that can be deducted from income thus lowering the amounts that will be assessed for tax.
Going back in time to decide what is a reasonable level of profit or income can often be difficult. Memory cannot be relied upon and records may be sparse or not exist at all. This is why a forensic accountant is frequently employed to prepare an expert accountant’s report investigating the tax payer’s finances.
Our experience has shown that full disclosure, well presented with rational explanations and as much documentary support as might be available will have the best chance of reaching a sensible result and prevent protracted criminal proceedings. Normal forensic techniques for reconstructing accounts from incomplete records must be employed and presented in a clear and unambiguous way so that arguments to pay a lower assessment can hopefully be accepted.