A client has been told she is getting an HMRC inspection on one of her tax returns. It is the year before I took her on but I've said she can have the meeting at my offices as her previous accountant lives a long way away. I've never done one of these inspections, can anyone let me know what happens? I presume they will look at her paperwork but what do they ask? The previous accountant had a flood and has lost her file so although she has her original paperwork I'm not sure what else she has. I've got a copy of the tax return from the HMRC website and as the turnover is low there is just a total figure for expenses and no detail. I don't think she knows how the last accountant calculated things like her vehicle costs (costs or mileage) or use of home for instance.
Hi Ive never been involved in an inspection for self assessment but I have for VAT and PAYE.
They generally start by asking lots of general questions - personal ones, for example, DOB, NI number, then when the business was formed, how it was funded/what she was living on (if the business wasnt generating an income to start with) - questions asked to get a general feel of the background of the individual and the business. The way of a lot of these are answered may then generate more in-depth questions.
They are usually very friendly in their manner (although I still view them as silent assassins - all Im saying is that they note it ALL). Ive always said to my clients - be honest, as even if this ends up with them getting a fine then it will be a lower fine! Tell her not to waffle nor make it up - if she doesnt know then say she doesnt know. Also be honest about the flood. That said, does the Accountant not have ANY paperwork that can help you? Im sure if your client rang him he would have some workings on file or info that could help her out (most likely some of his workings are on a PC, rather than just paper based).
With a VAT inspection recently - one instance they asked for the biggest invoice and a couple of random invoices then asked some questions round them - what were they for (even though it says it on the invoice)/how it was paid for. They didnt check any more of the papers, but take everything with you anyway. If they find something they will check more.
Good luck with it.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
I had one last year for a client. They were there for 2 and a half hours asking all sorts of questions. Some had obvious reasons behind them, others less so.
We're a year an a half on and it's still ongoing. Interestingly though, many of the questions they are now asking are not based on what we said, but what they wish we said. My advice would be to take comprehensive notes and make sure the client reads the minutes thoroughly after the meeting. What was said, and what they write was said can be very different things.
We're now being asked why there was no split of sales between two shops the client has, when it was clear in the meeting and the minutes that he didn't take on the second shop until the year after the year being looked into. So the reason we don't have sales is because he didn't have the shop.
Thanks very much, that's really useful. It's for 2012-13 and she had only just started out so there isn't going to be much for him to look at. We have both asked the previous accountant but he isn't being forthcoming. I will try once more for the use of home and car costs at least. I can't believe that he wouldn't have something electronic.
I couldn't believe the depth they were asking questions on an invoice for £24 (VAT inspection). I nearly said to her "you've got to be effing kidding." There was nothing dubious about the invoice and I couldn't understand the overall time devoted to something so small compared to a £300K turnover.
When the client mentioned someone stealing a charity jar some four years ago the inspector wanted more details - more precise time it happened. Did she get an incident number from the Police?
Every question, however innocuous and friendly is there for a purpose.
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Never buy black socks from a normal shop. They shaft you every time.
At a recent PAYE inspection I told my client to stick to the question, but omg he waffled for Britain and nearly talked himself into a VAT inspection, self assessment inspection and inspections for the rest of his family. Wouldn't mind but he is clearly following the rules, just couldn't stop talking rubbish!
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
My tact has always been to answer the question and no more. Engaging in conversation is likely to bring up other issues that they note and probably investigate deeper.
I just renewed my all client tax insurance cover today with Taxwise and the agent says that enquiries by HMRC are increasing. Which is what I have found as in the first 18 months of business had just one business records check but in the last 2 months have had; 2 VAT inspections, 1 aspect CT return enquiry, 3 business record checks.
I have just received the info my client gave her previous accountant to do the tax return being inspected. Although the income figure matches, the expenses appear to be double what they should be. This could be awkward. Does anyone have any advice for me?! It looks as if he has included every expense she gave him despite a lot of them not being allowable. And more on top actually. Do you think I should do the bookkeeping for the year again and we should own up at the start or shall we just give it all to HMRC and see what they come up with?
My advice is that although this could be awkward and expensive for your client, it is a marvellous opportunity for you of Revenue Enquiry's. Think of 12/13 as the land before time began. Although you will do your utmost to defend the client, it wasn't your work. You can't lose.
Estimate the real profit as you see it and the tax consequences.
Analyse the differences in your interpretation of the expenses to see if you can isolate which areas are causing the largest errors. Let us know what these are.
If you are 90% certain that this is an under-declaration then you should advise the client to seriously consider volunteering this before the HMRC meeting. The client may then instruct you to prepare the year again.
She has given him figures for her home and he has included all of them instead of apportioning them (including TV costs!). There are amounts for clothing, house decoration, building a shed in the garden, glasses. She has put everything she could think of on a spreadsheet assuming he would knock out what wasn't allowable but unless she brings a lot more receipts when I see her later today I can't see how it is right. She was only starting out so it wouldn't take too long to do it again. I really feel for her because she has been totally transparent with me on the 2013-14. She doesn't know about this sort of thing so trusted it to an accountant and this happens.
You may be able to sketch a revised profit figure to indicate your course of action. Advising your client becomes easier if there are no or little tax consequence and you can agree a reasonable amendment to the Tax Return. The Revenue won't be necessarily insist on a complete new set of accounts even for a small taxable profit.
Consider any implication for NIC, VAT Returns etc.
Being as up front as you can will minimise any penalties and have a pad listing every single thought that crosses your mind in how the client took reasonable care to get things right - their compliance history (registering on time, tax credits and all previous HMRC contacts), any indication given to the accountant that domestic expenses were to be apportioned.
Thank you. I've asked her to bring me all correspondence she had. She won't have known about apportioning home expenses etc. That's why she used the services of an accountant. As an individual I think you should be able to assume that if an accountant does your tax return that it's right! Whether she asked him to apportion it or not he should know that you can't claim for Sky TV! Will let you all know how I get on.
I'd just say that if she's separated out pure business expenses, like, stock, advertising, repairs but then lumped the dual domestic expenditure into Sundries or Drawings then that would be an indication that she expected the accountant to deal with those appropriately.
I just thought I would update you all on the inspection I had recently. It was clear that my client's previous accountant had not done her tax return correctly and had claimed for a lot of expenses that were not allowable. We were open about that in the meeting with HMRC and he agreed that she had done the right thing by getting an accountant to do her tax return for her and could reasonably have expected it to be correct. He took all her paperwork away and looked at it. As we were as helpful as we could be there was no fine. There was some tax owing but he said he could see that I was doing everything right now he didn't think the previous return needed amending. I actually thought he was very reasonable from start to finish, a lot nicer than I was expecting!
So where does an individual stand with something like this? The small trader relies on their accountant to do their books properly, and calculate their tax liability, and they pay good money for that service. If this sort of thing comes back to bite them on the bum a few years down the line that seems unfair to me.
Yes a client would expect that their tax would be calculated correctly by the accountancy provider but in the event of a tax miscalculation the tax would still be owed by the client (The debt would have always been there, just the client would not have been aware of it).
However the client could reasonably (in theory at least) look to their accountancy provider to reimburse, any penalties, interest, or fines imposed, as the expert should have done their job properly (That's why we have PII, just in case we make a mistake). Depending on the type of agent the client used, they could still pursue the agent, years later down the line.
The fly in the ointment, will always be, whether the client divulged all the necessary information to do the job accurately. I had a case where a client forgot a small pension they received, and got a small penalty, so his fault. If I have overlooked it, it would have ben my fault, and I would have accepted that I should bear the cost of penalty.
