Setting your tax records straight

An Inland Revenue inquiry into your books needn't be daunting if you have patience and a good accountant, says David Ingall

Over the past few years, with the introduction of Self Assessment, the number and style of Inland Revenue inquiries has changed for the worse. The prospects of facing an inquiry are not pleasant, with a government representative trawling through your books and records. There is stress and cost as well as the prospect of them finding something they think is not tax allowable or discovering income they think you have not declared.

Over the past few years, with the introduction of Self Assessment, the number and style of Inland Revenue inquiries has changed for the worse. The prospects of facing an inquiry are not pleasant, with a government representative trawling through your books and records. There is stress and cost as well as the prospect of them finding something they think is not tax allowable or discovering income they think you have not declared.

The chances of successfully resisting such an inquiry can be improved by understanding the process and the lines of attack the Revenue pursue.

There are two basic types of investigation opened by the Inland Revenue. Both are opened with letters addressed to you and your agent (accountant). Establish at the outset which type is involved as this may save you considerable worry. An Aspect inquiry deals with one or two specific aspects of your Return. It might ask you to produce certification to support pension contributions or bank interest received. It may deal with a technical aspect of your Return on Capital Gains or the like. In most cases those aspect inquiries are over in days or weeks.

Full inquiries take longer, anything between six to 18 months, and the Inspector of Taxes will be conducting an in-depth review of your accounting and personal records. The Inspector will often ask to examine your books and records and may wish to conduct a preliminary meeting to review the way in which you conduct your business and establish details of your lifestyle. You should never attend a meeting with an Inspector unaccompanied by your accountant. Notes are taken of meetings and there may well be two Revenue staff present, one taking notes. A careless remark or placing a series of personal events in the wrong tax year can and does create major problems which will unnecessarily extend the inquiry.

The Revenue generally have 12 months to open an inquiry following the latest filing date for the Return. For example, the 2004 Return (to 5 April 2004) should be filed by 31 January 2005 and thus that Return is open to inquiry until 31 January 2006, assuming it is filed in time. If it is late there is an extension for the Revenue depending how late you are.

Common areas of inquiry on business records are:

* Can you justify your debtors figures at the year end and if there are bad debts can you justify them?

* Is all your income included in your accounts and Return? This is an issue particularly if you engage in a trade where cash transactions are common. The Revenue have a suspicion of such businesses.

* Have you included all your stock and work in progress at a reasonable value at the year end?

* Does your lifestyle accord with your visible income? A newspaper story can be embarrassing if you're shown as socialising above your apparent income.

* Can you justify (in detail) the business use of your car or cars?

* Can you explain all the credits into your business and private bank accounts?

And before it all begins there is an important matter to consider. Have you told your accountant everything? If there is an issue, address it immediately. He'll advise you. Coming clean will potentially reduce any penalties. Equally, remember that the fact an inquiry is opened is not proof that the Revenue have or suspect anything. A clear conscience will see you through.

Talk to your advisor. Be polite with the Revenue but if you feel that you are being dealt with unfairly, say, through your accountant initially. Don't go to a meeting without some idea of what it is about. Inspectors are becoming accustomed to being asked for an agenda and if they stray significantly from that the meeting could be suspended. Meetings should not last more than two to three hours and should take place at the accountants', not the tax office nor your business premises.

Every inquiry is different. Every Inspector of Taxes is different. Do not be impatient, take your time answering questions and remember the Inspector does this for a living but you know more about yourself than anyone. Good Luck.

David Ingall is a partner with JW Pickles and Co., a member of the 200 group of accountants