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Case Studies What these studies show
Manufacturing A Mistake The Inspector of Taxes investigated a manufacturing business in the West Midlands. He extensively reviewed the records and, following a meeting with our client, the Inspector accepted that he could find no errors in the records. Story over and happy ending? No, the Inspector had simultaneously opened an enquiry into the Directors' own Self Assessment Returns and asked to examine the personal bank Deposit Accounts. He was entitled to review these Bank Statements because the interest receivable was declared on the Self Assessment Return. The statements contained a deposit of over £20,000 in one of the Director's private accounts. It was explained that this money had come from various sources but the Inspector said that if he could not see documentary evidence to support the origin of the deposit he would treat the money as business income and tax it accordingly. The power of using Tax Defence consultants Our consultant argued this point and said that the business records had been shown to be correct and so it was not a 'safe' assumption for the Inspector to make. After an extensive exchange of correspondence, we asked the Inspector to submit the case to the General Commissioners of the Inland Revenue for them to decide. Presented with this option, the Inspector finally accepted the point and concluded the enquiry without any adjustments. The cost of defending the allegations exceeded £5,000. Fortunately this was covered by Tax Defence insurance policy. Driven To Drink The Inspector instigated an investigation at a country Pub. He reviewed the business records and identified that the declared sales figure was incorrect. The Publican accepted that he had been taking cash for his personal means out of the business without recording the withdrawals as drawings. This provided the Inspector with the opportunity to produce a 'business economics model' to try and establish the actual income that would have been received. This entails identifying all purchases made for resale and then applying the selling price to these items. The outcome of the Inspector's exercise was that the declared sales figure for the year of enquiry needed to be increased by £91,000 which would have resulted in a liability of approximately £30,000 on which interest and penalties would be charged. In addition to this, the Inspector was also seeking to scale back the adjustment over the last 6 years. The Inspector wanted £200,000 to settle the investigation which was clearly an excessive request! It was accepted that the sales figure was incorrect but the size of the adjustment was not agreed. Our consultant reviewed the Inspector's calculations and identified a number of errors as well as areas where the Inspector had included estimates. Our consultant then produced a revised business economics model that showed the sales figure only need to be increased by £15,000 and furthermore, the adjustments were only required for 3 years rather than 6. The Inspector accepted the revised figures and concluded the enquiry on that basis. Overall the Publican had to pay a settlement of approximately £11,500 inclusive of interest and penalty. Furthermore, insurers paid the £7,500 costs of representation that were incurred on his behalf. PAYE Chaos- the cost of not having cover The Inland Revenue conducted an Employer Compliance visit into a large employer; nothing unusual in this one might think. However, the audit team comprised of 7 officers of the Inland Revenue and the review took place over 5 days! During this review the employer dealt with all enquiries arising and was generally pleased as to the progress. However, following the review the employer received a 12 page letter raising questions and concerns about 34 separate areas ranging from the treatment of company pool cars, operation of SSP, expenses claim records, home based workers, subcontractors, termination payments and overseas employees! The work involved was immense and there were some very significant technical points which needed detailed attention by experts. Initially, it appeared that the additional tax and NIC liabilities could be as much as £200,000 in one year alone, however, ultimately the employer was able to settle off the investigation with a payment of £20,000 in respect of all years. However, the costs involved in defending the employer exceeded the additional tax that was due! Unfortunately, the employer did not have the foresight to take out the insurance and the £30,000 representational costs had to be made out of the employers' profits. Furthermore, the Inland Revenue did not allow the costs of representation as an allowable deduction against profits. |
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