Last year's returns can come back to haunt you

If you seem to live outside your means - or just outside the country - the Inland Revenue might well have its eye on you, warns Roger Trapp
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WITH THE 31 January 1999 deadline for this year's personal income tax returns looming, it is tempting to think that last year's document has been consigned to history. But that is not the case.

Many taxpayers could find their Christmas post soured by an inquiry from the Inland Revenue. This is because part of the philosophy of self-assessment is that the Revenue can inquire into anybody's tax return for any reason at all. As long as the taxpayer returns the document by 31 January, the authorities only have the next 12 months in which to launch a standard investigation, though it would still be possible to start an inquiry into suspected fraud or incomplete disclosure after that period. However, if a taxpayer is late getting the form back, the Revenue has until the end of the quarter following the first anniversary after the submission of the return to begin an investigation.

Though accountants have seen some inquiries into last year's returns in the past year, there have not been as many as they would have expected. The firms reckon that this is because district tax offices have been so overwhelmed by the introduction of self-assessment that they are significantly behind schedule.

In the old days, this would probably have just led to the deadline passing harmlessly. But in this era of performance targets, it is thought that many offices will be tempted to - in the words of David Williams, tax partner with Smith & Williamson - "keep the door open by launching some sort of investigation".

"I've a feeling there may be quite a lot of inquiries started over the next few weeks," he added. In some cases, the inquiry will be "quite innocuous", but in others - such as where the taxpayer is self-employed - it can look more serious.

Though there is a code of practice - in line with the soft image of self- assessment the Revenue has sought to portray with the aid of the mascot "Hector" - the letters can look alarming, says Mr Williams. And anybody in this situation can find that they are dealing with "Hector's rather less friendly brother", he suggests.

Nevertheless, the over-riding message is not to panic. "So long as you co-operate sensibly and truthfully in a reasonable time, the worst thing that will happen should be writing a cheque," says Mr Williams.

At the same time, though, he warns taxpayers to take such investigations seriously. While its larger rival PricewaterhouseCoopers is challenging clients to find the funny side to Revenue investigations by playing a game called "Trouble with the taxman", Smith & Williamson reminds them that these investigations do not go away. Not surprisingly, it suggests that taxpayers - even if they have filled in the return themselves or used one of the standard tax return services - seek the help of a firm experienced in investigations. Accountants from such a practice will then be able to assess the seriousness of the situation and advise accordingly.

PwC's John Nisbet explains that, although its game is meant as "a new and thought-provoking way of looking at this subject", the message is that even in-depth investigations of this sort can be survived with the "business and family intact".

Since the Revenue has committed itself to making routine checks on returns, some of these cases can be dealt with quickly, but others will warrant more attention.

In particular, taxpayers need to bear in mind that the Revenue has a system for scoring returns in relation to risk. Accordingly, returns from people who have offshore holdings or are not UK-domiciled for instance, are more likely to attract interest. Similarly, the Revenue is often suspicious of businesses where there is a high cash element and where lifestyles do not match information on returns.

The Revenue also looks at turnover trends, and - according to accountants - has a tendency to assume that they always go up. Accordingly, Mr Williams is prepared to see farmers - who have seen earnings plummet in recent years - attracting interest.

What people have to remember, he says, is that the Revenue is much more financially-driven than it was when income tax was introduced 200 years ago. Last year, compliance activity by officials may have raised as much as pounds 2bn - equivalent to more than 1p on the basic rate of income tax.