How The UK Taxman Can Legally Screw You – And For How Much

It may be a bit of an attention grabbing headline but, that is my true opinion of these largely unknown new powers. And, if you run a business of any size or are self-employed, you need to be aware.

As we all know, taxes are a good thing. Yes, you read me correctly. A good thing.

Much as we hate it, if no-one pays tax, there would be no publicly available schools, no Welfare State, no lamp-posts, no police, and no-one running the place. Tax collection is one of the fairest ways to get those who have money to pay for it for both themselves and for those who don’t have any money.

And I am being generalistic (is that a word?) here so don’t hassle me on your opinions of what I just said, please.

The New Inspection Legislation

Now, with all that said, you obviously must pay your taxes correctly and on time to HMRC (Her Majesty’s Revenue and Customs). But, they keep changing the rules and expecting us to be able to keep up to date with all the changes. Which is not easy when you are trying to run a business and keep a personal life going at the same time!

You are expected to keep proper records of your business transactions – invoices, receipts, bank statements, etc – for seven years and you are likely to be inspected by someone or other to do with VAT, NI or tax once in every six years or so.

Or, so you thought!

But, that has all changed under new legislation to extend the powers of HMRC so that it is more likely to get a financially rewarding result.

They are also now legally authorised to ‘go fishing’. In other words, they can start an investigation for whatever reason because they know that there are likely to be some errors and, from that, they can exact penalties. Please read on.

What Can be Inspected by HMRC?

They can inspect business premises including cars, vehicles and parts of homes used for business along with business documents and assets. But, and here is one of the surprises, they can inspect private bank accounts that receive transfers from a business accounts. So, it is imperative that you accurately record and annotate any transfers so they have a proven purpose.

Unexplained deposits will just be treated as taxable.

When Can HMRC Inspect?

The power is there if it is “reasonably required for the purpose of checking that person’s tax position”, to enter and inspect. The kick in the teeth here is that a ‘tax position’ can include anything to do with any tax and will include the past, and the future with no time limits.

You may have noticed the word ‘reasonably’ but, get this, there is no right of appeal against the decision of what is ‘reasonable’.

However, according to HMRC, all inspections will be for a reason so, if you are being inspected, you can make the assumption that they are planning on finding something and won’t stop until they do.

What Penalties Can HMRC Impose?

This is where I refer to them “legally screwing you” because the penalty for a careless inaccuracy is a minimum of 15%. So, if you made accounting errors because you did not understand the rules, tough!

If you made a deliberate error but did not make an effort to conceal it, the minimum penalty is 35%. Make a deliberate error and try to conceal it and your minimum penalty will be 50%.

But, these are all where the inaccuracy is ‘prompted’. In other words, if the taxman is coming, you know he or she is looking for something so you may want to tell them if you know something is wrong. That will be a ‘prompted disclosure’. Imagining that they won’t find whatever you want to hide puts you in Cloud Cuckoo Land and will result in much higher penalties.

Also, it is widely expected that, the way the HMRC conduct these inspections, that the average penalty will be 20% higher than the minimum. That means an effective minimum of 35% for careless inaccuracy – gulp!

What Can We do To Protect Ourselves?

There are a number of steps that you can take to keep your liability as low as possible.

First of all would be to keep accurate records or books. I find it hard to believe the number of small business people and self-employed that don’t use a computerised accounts package or a bookkeeper.

We’d all think that they days are gone when you take your receipts to your accountant at the end of the year in a Tesco bag. But, no, this is still the case for many. If you don’t want to pop down to PC World and buy a simple accounts software package and then go on a few evening classes to learn how to use it, then get a bookkeeper – a proper one.

Debbie does my books and has dome for the last three years or so. I could do them but why would I? Debbie is a lifesaver and I can get on with my work while she keeps everything up to date. And, no, you can’t have her; she’s mine!

Second recommendation is to make an effort to learn what your financial figures mean. It is not rocket science, seriously. Even if you think you are thick or were rubbish at Maths at school, you’ll be OK. You don’t need to be an accountant but, if you can understand the accounts, you may be less likely to suffer from fraud and embezzlement and be more likely to spot problems. All successful business people will be able to read their financial reports at a basic level at least.

Third would be to make sure your books are kept up to date. If you get an inspection 10 months into a year and planned to do the books at the end of the year, you’re stuffed!

Fourth is to get a good accountant. Mine was recommended by my original employer and, over 25 years later, I still use the same one and they may not be the cheapest but, wow, do I ever get value for money. I would recommend them to anyone. Make sure they are properly qualified and check their credentials. Do not go by price or location.

Finally, get yourself insured against an inspection. This will have your accountant’s fees paid to help defend your position. If you are a member of your local Chamber of Commerce (which you surely are, aren’t you?), it will include this. The Institute of Directors, Federation of Small Businesses and the Forum of Small and Private Businesses will all include this within membership and it is worth joining one for the information they give on all things business, anyway. Also, you may want to check your trade association for the same.

Is It All Bad?

The taxman is not out to get us but, due to all the tax-dodgers out there and other circumstances beyond our control, we could be due an inspection tomorrow. A friend of mine – a world famous internet marketer – accidentally fell foul of the IRS in the USA and had to pay $1,700,000 in back taxes and penalties because he misunderstood the system. And the IRS did not have the same powers that the HMRC have!

Be prepared because the above advice could save you a ton of money…tomorrow.

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