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HMRC have the power to “enquire” into any tax return from a company, a partnership, or an individual. They do not have to give a reason for the enquiry.
Anyone in the property business may face an Enquiry – a certain number of random Enquiries are opened every year.
Enquiries come in different forms:
“Aspect” Enquiries
These are the least serious type of Enquiry – though they have been known to develop into Full Enquiries as they progress. In an Aspect Enquiry, the inspector will ask questions about a specific issue in the return – a favourite example for a property letting business would be to check if amounts claimed for repairs to a let property are in fact capital improvements (that cannot be deducted from rental income). A common query for property developers would be whether or not projects in progress at the accounts year-end had been correctly valued, so as to recognise an appropriate level of profit on sales made in the year.
Many Aspect Enquiries are closed down with no penalties being charged – though this is not always the case if large or blatant errors are found – but there will be interest to pay on any additional tax that is collected, running from the date the tax would have been paid if the return had been correct in the first place.
“Compliance Visits”
These are aimed at checking that the business has complied with its obligations under the various laws and regulations it is obliged to obey. A compliance visit can be arranged to check that you are keeping the appropriate business records generally, but most are more focused on particular aspects of tax compliance. For property businesses, the commonest are:
- Construction Industry Scheme (CIS) compliance
The CIS applies to all property developers (but not normally to property investors), and requires them to check the credentials of all the subcontractors they use, and record all payments to them, while in some cases deducting tax from those payments.
- PAYE and benefits in kind
A sole trader or partnership will only be liable to this type of Enquiry if it has employees – but it is possible that people treated as self-employed sub-contractors should instead be categorised as employees, as we saw earlier. The Enquiry will check if the business has operated PAYE correctly, and if all benefits in kind and expenses payments have been correctly reported on the annual Forms P11D.
- VAT
HMRC will (for example) check that any property purchases have been handled correctly where there are Transfer of a Going Concern issues and that options to tax have been put in place properly on commercial buildings. A business that is “partially exempt” is also likely to receive the occasional VAT visit.
“Full” Enquiry
This is the type of Enquiry that is generally referred to as a Tax Investigation, and it will involve the inspector looking at all the business accounts and records, and in some cases the private bank statements, etc., of the proprietors. It may also involve some or all of the more specialised types of Enquiry referred to above.
This is not the place for a detailed examination of how to deal with a tax investigation, but there is one vital piece of advice – do not attempt to deal with it yourself! In particular, if you receive a notice from the tax inspector to say he has decided to “Enquire” into your return, seek professional help immediately – in the first instance, from your accountant, though in serious cases he may well want to call in tax specialists.
If it is found that tax has been underpaid, then penalties may be due.
There is one other kind of investigation to consider
This is where HMRC believe there has been serious tax fraud. In these cases, they will send you a “Contractual Disclosure Form” under Code of Practice 9 (“COP 9”). If you are ever sent a CDF, it is ABSOLUTELY ESSENTIAL to take expert advice from a suitably experienced Tax Adviser immediately.
UNDER NO CIRCUMSTANCES try to handle this yourself, and, at the risk of offending the profession, it is unlikely that your regular accountant will have the expertise to deal with a CDF investigation.
To end this part, here are the golden rules for dealing with tax enquiries:
- DON’T try to handle it yourself – get advice before you reply to the initial letter from the inspector, and at all costs DON’T ring the inspector up to “have a chat and sort this out”
- DON’T ignore it and hope it will go away – penalties are reduced for cooperation and disclosure, not for ignoring the Inspector
- DO be honest and upfront with your Tax Adviser – only then will he or she be able to help you
- DO talk to your accountant about taking out insurance to cover the fees for a tax investigation – the professional fees can be very expensive
