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My client who is self employed, and works three to four days a week, has recently received notification from the Inland Revenue that her 2001 tax return has already been chosen for enquiry, prior to it being submitted. The letter states 'The Inland Revenue is substantially increasing the number of enquiries into tax returns of people who have previously reported a turnover just below £15,000 in successive years'. The letter goes on '… please take care to ensure that you report all your income and claim only those deductions to which you are entitled'.
My client who is self employed, and works three to four days a week, has recently received notification from the Inland Revenue that her 2001 tax return has already been chosen for enquiry, prior to it being submitted. The letter states 'The Inland Revenue is substantially increasing the number of enquiries into tax returns of people who have previously reported a turnover just below £15,000 in successive years'. The letter goes on '… please take care to ensure that you report all your income and claim only those deductions to which you are entitled'.
Have other readers encountered this situation, and is the notification received legal, in view of the fact that the Revenue has (currently) nothing in which to enquire?
(Query T15,847) – SK.
Practitioners in the Huddersfield area have received similar letters from Bradford Midland and Leeds districts. When I spoke to an Inspector in Bradford Midland to ask if this was a local or national initiative, I was told that it was a national initiative.
The letters sent by Bradford and Leeds vary slightly. The Bradford district advises the client that his 2001 return 'has already been chosen for enquiry'. The Leeds letter says that it may be. As 'SK' notes, however, in the writer's view this cannot amount to a formal notice to enquire into the return as required by section 9A, Taxes Management Act 1970. That section notes at paragraph 1:
'An Officer of the Board may enquire into –
(a) the return on the basis of which the person's self assessment was made under section 9 of this Act … (my emphasis)
if before the end of the period mentioned in subsection (2) below he gives notice in writing to that person of his intention to do so.'
Subsection (2) defines the period mentioned in subsection (1) as a period of twelve months beginning with the filing date (if the return is filed on time) or a slightly longer period ending with the quarter day following the anniversary of the filing date if the return is filed late.
A 'notice' is defined at section 832(1), Taxes Act 1988 as 'means notice in writing'.
There is therefore no specific form, as required by statute, that a notice of enquiry under section 9A, Taxes Management Act 1970 should take. The Inland Revenue's Enquiry Handbook at paragraph EH300 in its guidance to Inspectors suggests a form of words that could be used. The suggested wording includes a reference to the Code of Practice under which the enquiry is being carried out (and encloses a copy).
I would suggest that the use of 'was' by the Parliamentary draftsman in section 1(a) should lead to the conclusion that a section 9A enquiry can only be made into a return after the return has been made. In my view, the return is not made until it is filed.
What we have in the Inspector's letter therefore can only be a notice of his intention to select the return for enquiry, after it has been made. This is subtly difference from a notice to enquire into a return, and 'SK' should insist on the correct formalities after the return is filed, if indeed the Inspector does enquire into the return.
The letter puts the client on notice that the Inspector proposes to look at his income and expenses in detail and effectively warns him that his figures had better be correct or else.
It seems to me that the Inspector can only gain from this initiative. If he decides to issue an enquiry notice, settlement of the enquiry should be speedy, as 'SK' and his client forewarned of the possibility of an enquiry will, one assumes, have already discussed and examined all the matters that the Inspector would normally enquire into.
If, despite his intentions, the Inspector cannot find time to enquire into the return within the twelve-month (or so) period from when the return is filed, he should still have a compliant taxpayer, as 'SK' and the client have effectively done his work for him. – Taxplanet.
We have had a similar experience to 'SK' with a locally-stencilled letter for a client, informing her that there was an increased likelihood of her return being enquired into. Rather than leave things to chance, we spoke to the tax office which explained a little more. Apparently, since the introduction of '3-line accounts' under self assessment, the number of businesses in this country whose turnover is between £14,000 and £15,000 has jumped substantially.
Not unreasonably, Revenue eyebrows have been raised at this and so instruction has been sent out to increase enquiries into this particular segment of turnover. There is nothing more sinister or illegal about this than an increased level of inspection of taxi drivers or saxophone players. Districts seem to have interpreted their instructions differently, with 'SK's' Inspector pre-ordaining clients for likely enquiry, and others just warning of potential enquiries.
From our conversation with the Inspector, the easy answer is just to provide a fuller completion of the specific expenses boxes on page SE2 of the tax return. The Inspector in fact suggested that so long as those figures are submitted every couple of years or so, then the client would be treated just as any other business with a turnover of £15,001 would be. A covering note in the additional information box on the self employment pages explaining that the fuller accounts figures are provided will possibly stall enquiries at an early stage. – Geoff C.
Extract from reply by 'Hodgy':
The Inland Revenue may believe that this will be fertile ground for them and that the content of three line accounts could hide a multitude of sins whether deliberate or just because of a lack of knowledge.
Hopefully the Inspectors dealing with these cases will recognise that the owners of such businesses will often not have a high degree of financial sophistication and take account of that fact when considering penalties if any amendments are highlighted. A system of taxpayer education as an alternative to penalties would demonstrate an enlightened approach.
'SK' should be pleased that this letter has been issued to his client. He now has the opportunity to be as sure as possible that the enquiry will not result in any amendments to his client's tax return. Such an investment in the time of 'SK' by his client may produce a handsome return if one adds on the potential for adjustments to the previous six years as well as the year of the enquiry.
One difficulty arising from the issue of the warning letter could be with professional fees insurance. If the section 9A notice has not been issued and the policy year ceases, would the client be able to renew her cover? If she already has cover and renews it on time, she will still be covered. However, if the taxpayer does not already have cover when the intention to enquire letter is issued, it is unlikely that cover will be given.
