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Enabled To Comply
DO YOU REMEMBER the days when we submitted accounts and taxation computations to the Inland Revenue with a covering letter? Sometime later the Inspector would reply, perhaps with a few queries, and then, these having been resolved, a form would be sent showing agreement to the accounts and computations under section 54, Taxes Management Act 1970. Then, assessments would be issued, checked and the tax paid. All this has been replaced now by the self assessment system.
In one vital respect it is clear that the Inland Revenue sees self assessment as a hindrance. The only way that the department can query anything in the business accounts or tax return is by raising an enquiry under section 9A, Taxes Management Act 1970. Alternatively, the Inspector of Taxes must make a discovery under section 29A, Taxes Management Act 1970, which has to stand up under scrutiny.
Even a simple telephone call to the taxpayer's agent is forbidden, so why not write a crafty letter to the taxpayer warning him that there may be discrepancies in the accounts which could lead to an investigation?
The enabling initiative
In fact, this is exactly what has happened. About two years ago, taxpayers with business accounts showing a turnover of under £15,000 were faced with such letters. The initiative has now been extended to traders with a turnover between £15,000 and £150,000. A typical letter to the latter class of taxpayer sent in 2004 reads:
'You will recently have received your self assessment tax return for 2004.
'This letter is to remind you that the return is a legal document and your signature is a declaration that the information in the return is, to the best of your knowledge and belief, correct and complete.
'From a risk review of 2003 returns, we have identified an aspect of the self assessment pages of your return which may need particular attention. We want to help you get this aspect right first time, which may avoid the need for an enquiry. I am therefore enclosing some "questions and answers" which aim to help you with that part of the return.
'If you believe that there are special circumstances that have contributed to an unusual business or expenses pattern, you can use the additional information box 3.116 on page SE4 to clarify the situation.
'If we find your return is wrong, we will recover any additional tax that may be due, with interest and a penalty where appropriate. If you are uncertain about what to declare as income or claim as an expense, please seek advice. Advice may be obtained from many sources, including your tax adviser if you have one, or any of our Inland Revenue offices.'
The letter goes on to talk about on-line filing of the tax return and finishes by stating that a copy of the letter and of the questions and answers will be sent to the agent, if one is acting for the taxpayer.
In fact, however, it appears that in numerous instances the agent has not received the copy of the letter sent to the taxpayer.
Frequently asked questions
In the case of the business with a turnover between £15,000 to £150,000, the frequently asked questions concentrate on dual purpose expenses, such as motor vehicle expenses, home telephone, and use of a room in the home as an office. Taking goods from stock for own use is also mentioned, as is the payment of salary to spouse, and the validity of claiming the cost of a business trip.
For traders with a turnover of under £15,000, it seems that letters have only been sent this year to unrepresented taxpayers and follow a fairly similar pattern to the details explained above. However, the frequently asked questions are much more comprehensive and include sections regarding the cost of repairs to plant and machinery, interest on loans to finance business activities, advertising and promotion costs, business clothing, and the cost of staying away from home overnight. Also included is a section about capital allowances on plant and machinery.
A hindrance to good relationships?
While one agrees that taxpayers need to file correct accounts, computations and returns, the receipt of one of these 'enabling' letters by a client will undoubtedly be something of a shock.
The initial reaction of the client will be that he is going to be investigated, and he is likely to think: 'Why did my accountant not warn me about this?'.
The Inland Revenue has stated that this initiative has received the assistance of the working together groups, but it is understood that this is not strictly true. The letters have certainly not been sent out with the blessing of the various professional bodies.
The whole scenario can therefore be seen as a heavy handed approach by the Inland Revenue, which will do nothing to further relationships between taxpayers and their advisers, and between both of those parties and the Inland Revenue.
The information on which the letters are based appears to be computer generated and the additional information in the 'white space' of the self assessment return seems not to have been referred to before the letter is sent out.
This is a national initiative and letters will continue to be sent out until the end of August 2004. Copies are supposed to have been sent to all agents where a form 64-8 is held but, as mentioned above, there is evidence that this may not have occurred in all cases.
Often, there may be a perfectly innocent explanation for the basis of the Inland Revenue letter, which incidentally is not identified. It is like saying to the taxpayer 'there may be something wrong with your accounts and tax return, but we are not going to tell you what it is'. The terms of the letter are rather similar to an old fashioned tax investigation initial letter before self assessment, where no clue was given as to reason for the enquiry.
Reaction of client and adviser
A subscriber to the Internet site AccountingWEB suggested a suitable response to the Inland Revenue in his contribution dated 2 July 2004. This reads as follows:
'Thank you for your letter of …
'You may rest assured that our client's tax return for the year ended 5 April 2004 will be prepared with the same care and attention as that of the previous year, both being prepared with no less than the care and attention normally required of any taxpayer in the preparation of any tax return.
'You have a duty under sections 1 and 29, Taxes Management Act 1970, to satisfy yourself as to the adequacy of a tax return properly delivered. If you are not so satisfied then you have a duty to make such enquiries as are necessary to bring about such satisfaction, whether by negotiation or imposition by the Commissioners or (as the case may be) judiciary. Your powers to make such enquiries are set out in section 9A, Taxes Management Act 1970.
'We note that your letter makes no reference to section 9A, Taxes Management Act 1970, as we understand to be customary, but there is no statutory requirement for such reference to be explicit. It is, however, clear from your letter that you are dissatisfied with the return for the year ended 5 April 2003. On the reasonable assumption that you have acted in accordance with your duty we must assume that your letter comprises a notice of enquiry under section 9A. As there are no specific matters raised in that letter requiring a response we assume that there are no such matters and we have accordingly written to the Commissioners (copy attached) requiring them to issue a direction to issue a notice of closure of said enquiry under section 28A(4), Taxes Management Act 1970.'
I cannot better the wording of that letter, and it goes right to the heart of this whole controversy. The Government and the Inland Revenue have initiated self assessment, with all its legislation and procedures. The professions and taxpayers have co-operated to a tremendous extent, at great cost to themselves. Surely, now all parties must live with what is on the statute book and accepted practice, without the sort of tweaking contained in these enabling letters? The draft letter reproduced above suggests that they may not even be legal, without considering all the other issues.
