Tax from the Trenches: “Who needs an accountant?"

I am writing this blog following a meeting with HMRC. The reason for the blog will eventually become apparent and will hopefully show that when dealing with HMRC, particularly in enquiry cases, it is an absolute must to have a tax accountant in your corner.

The background to this case started five years ago when HMRC showed an interest in one of our clients. The company in question had a workforce of around 1,000 people, the majority of which were engaged on a contract of services and charged their costs through a limited service company. They had done so for many years. At the point when we acquired the client, this practice had been in place for many years and, although no-one really knew this at the time, many of the contractors had been less than diligent in filing company accounts and self-assessment tax returns. HMRC believed there to be significant tax leakage and a major status issue and duly commenced an enquiry. The case rolled backwards and forwards for years and at one stage the company was facing estimated PAYE and NIC assessments totalling £20million, however the case was eventually settled for around £100,000 with an agreement that most of the contractors would be dealt with under PAYE going forward. As part of their fact finding, HMRC registered some of the individual contractors and their companies for investigation, principally to find out the contractor's working patterns.

As well as acting for our client, we were also appointed to act for the contractors that had enquiries. We managed to get their cases put on hold while we negotiated the main company settlement. Unfortunately, the agent who initially prepared a lot of the contractor’s service company accounts hadn't done a particularly good job, so in addition to asking the usual status questions, HMRC also asked about some of the expenses that had been claimed. When the main company case was settled HMRC started looking to reactivate the smaller contractor enquiry cases.

Our meeting with HMRC

At the outset I have to say that the HMRC officers were very polite and personable, and I appreciated that they had made the journey from Bristol to Essex. At the meeting, all was progressing nicely as we discussed the merits of some of the expenses claimed in the accounts when I raised the subject of earlier years. I gently suggested that the client would be amenable to a one year deal but any question of earlier years would be pointless. The client is of limited income and means but, more importantly, there is an issue of deciding whether the client was careless in his actions, and whether his careless behaviour gives HMRC the right to assess earlier years in addition to the enquiry year. In simple terms, HMRC can assess four years without needing to establish any form of careless or deliberate behaviour. To assess over four years and up to six years HMRC must establish that a person was careless. Anything over six years and up to 20 years they must establish a deliberate behaviour.

I had already set out our position in an email to the Inspector, explaining that, in my view, the client was not guilty of careless behaviour. The circumstances of this case are that our client went to an accountant when he first started working for our company client in 2007. The accountant advised him to set up a limited company and told him he would prepare the company accounts and personal tax return. The client is very good at his job, but by his own admission, is not very good with reading, writing or numbers. He has no understanding of tax and put his faith in the accountant to prepare the accounts and tax returns each year. He asked the accountant what he needed to keep in terms of receipts and invoices and was told he needn't worry. The accountant knew what he was entitled to claim and would prepare accounts on that basis. Accounts were duly prepared each year with, what must be said, questionable and in some cases excessive expenses. However, our client had complete faith in the accountant and signed the accounts. HMRC will always make the point that reliance on the accountant is not a reasonable excuse, and in some cases they have a point, but these arguments are generally connected to the quite separate argument as to whether a penalty should be charged.

The company accounts that are subject to enquiry are for the year to June 2014. To raise an assessment for the year to June 2013, HMRC would need to show the client had been careless. For any earlier years they would need to establish a deliberate behaviour. The Inspectors listened to my explanation and then promptly told me they considered this was a case of deliberate behaviour and they intended assessing all the way back to 2007!

At this point I advised the Inspectors that there would be no question of us agreeing to anything like 7 years and that we would appeal the assessments and ask for the Inspector's decision to be independently reviewed. I also doubted very much that the reviewing officer at HMRC Solicitors Office would agree that this was a deliberate behaviour. I went on to explain that the company was not currently trading and had no assets. Even if the assessments were confirmed as payable at a tax tribunal hearing, HMRC would have no real option but to put the company into liquidation which would save the client money because that is his long term intention anyway. The Inspector ventured that HMRC would appoint a liquidator to claw back money from what would be an overdrawn director loan account. I said I doubted this would happen and pointed out that the potential claw-back would be outweighed by HMRC's costs in paying a liquidator and that, in my experience, HMRC would not take much of an interest in a fairly small case like this. More likely the liquidation would be dealt with by the official receiver who would realise very quickly that the client has no assets or savings and lives in rented accommodation.

The issue of behaviour and earlier year assessments was discussed at length over several hours and eventually the Inspector conceded it was unlikely they would succeed at tribunal with assessments for the earlier years. It did seem to me that they had come to the meeting fully expecting to leave with an agreement for 7 years tax interest and penalties and they looked a little deflated when they left. They promised me some settlement figures in the next week or so and I will most likely advise the client to settle, providing the figures are reasonable.

Why you need a tax accountant...

It strikes me that if an unrepresented taxpayer were in the meeting yesterday, HMRC would have walked all over them and they would have left the meeting facing assessments that were unwarranted and unjustified. Some tax is payable without a doubt, and HMRC are fully entitled to seek a reasonable recovery for the year of enquiry, but it is the job of the tax accountant to make sure that the tax laws are applied fairly and even-handedly when it comes to assessments and penalties. It took a lot of discussion, persuasion and legal argument to convince the Inspectors that they were wrong, and I do genuinely believe they were wrong. I doubt that an unrepresented taxpayer would have been able to detract the Inspectors from their blinkered view.

So who needs a tax accountant?

By Neill Staff

Tax Partner

Neill Staff is our specialist tax partner. Contact him at  neill.staff@raffingers.co.uk or call him on 020 3146 1605. You can also follow him on LinkedIn.

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• Tax From the Trenches: “I haven’t slept in two years”
• Tax from the Trenches: “The best and the worst of HMRC”
• Tax from the Trenches: “I got it wrong…he said”
• Tax from the Trenches: “How much does HMRC know?”