Tax enquiries - to insure or not to insure? That is the question.

As I approach my 40th birthday I have found myself taking stock. And I have been reminded that most of us - and I am as guilty as the next man - have a natural tendency to over-complicate things that are really quite simple. So whilst we often tortuously go over every aspect of every decision, agonising over possible outcomes before eventually reaching a conclusion, we know deep down that we often make our best decisions based on nothing more than instinct and intuition. Indeed whilst it is often said that success is 1% inspiration and 99% perspiration, I have also heard it said that entrepreneurial success is 1% inspiration and 99% intuition - the perspiration is what we often pay others to generate!

Where am I going with all this? And didn’t the title for this blog say something about tax enquiries?

Well my point - around the houses though it has taken us - was this. I have lived many of my previous 39 years by a small number of quite simple rules. The one I wanted to mention today was something my wonderful grandmother instilled in me quite early on. I should say that she is still with us - 95 later this month and still going strong-ish. But in her more mobile days she was something of a top card player. She taught me everything I know about kalooki which admittedly is not much. That said she did always say, “Never play cards with anyone who has a city for a nickname!” In her mind, if they were called “Chicago Joe” then they probably got the name for a reason. And you can kinda see what she meant.

What has that got to do with tax enquiries I hear you ask? Well I deal with a huge and, as HMRC becomes more adept at targeting its work, ever growing number of enquiries and I have definitely noticed a new trend in recent years for HMRC to treat enquiry work very much like a game of high stakes poker. There was a time - not that long ago actually - where you could win an argument with the Revenue with a mix of sound technical knowledge of the issues and a robust defence of your position. And I’d like to think that a strong analysis of the facts still remains important and to an extent it obviously does. A marked change has arrived however in the shape of the new enquiry procedures that were introduced a couple of years back. One in particular saw HMRC adopt more generally a system that had for many years worked well for the old Customs & Excise in handling VAT disputes.

Now, in the case of disputes, the taxpayer has the opportunity to ask an independent second HMRC officer to review the facts and offer their opinion. It is obviously tempting to assume that the second officer will follow the lead of his or her erstwhile colleague but I have to say that was not my experience in the good old days when VAT & tax were handled by separate organisations. Indeed I had some very good “wins” at that stage often with large amounts at stake. Even when I was unsuccessful the second officer would write a comprehensive response explaining his point of view in coherent and cogent terms. Now however it is sadly commonplace to receive a standard response rubber stamping the original decision after barely long enough for anyone to properly consider the facts. The response will typically barely cover the issues in all but the loosest possible sense.

HMRC would naturally dispute this and undoubtedly quote statistics proving their point. All I can say is that one of my other simple life rules is to take as I find and it is a fair reflection of my personal experience that the modern second officer review is nothing more than a formality. So how have we got here? For that we need to look more deeply at the new enquiry procedures and how they are brutally loaded against ordinary taxpayers. Firstly, the only option after a second officer review is to take the matter to a tribunal, effectively a court hearing in front of a judge.So now, all HMRC have to do is stubbornly dig their heels in, rubber stamp their own decision and leave you with no option but to take legal action with all the costs that entails. That is not how it is supposed to be but my experience is that it is increasingly so. Oh and just for good measure, you are highly unlikely to be refunded your costs even if successful.

Ultimately therefore, you can often be left with a choice between accepting the commercial reality that paying the tax - even when you are convinced it isn’t due - is a better option than pursuing an expensive pyrrhic victory where costs exceed the amount at stake. This is a sad fact that HMRC appear increasingly aware of and prepared to exploit. Is it supposed to be like that? No it isn’t but that is little consolation to those who find themselves in the situation. I even had one client who was told by the HMRC officer that even though she agreed with him, she had been ordered from above to dig her heels in precisely because they knew he would never take it to tribunal! All this means that the case for spending the few hundred pounds a year it costs for tax investigation fee protection is increasingly strong. And again my own experience is that those with this cover often get a better outcome all round.

Let’s end however with a nice story that sums up how David can still - with good advice and persistence - defeat the HMRC Goliath. A client of mine was faced with exactly the dilemma we have looked at here. The VAT at stake was less than £20,000 but he really believed - and I agreed - that it wasn’t due. So after I spent some time taking him through the issues, he took the decision that he had nothing to lose by taking it to tribunal and representing himself. Which he did only last week….and in a moment to reassure faith in justice, the judge ruled in his favour and threw out HMRC’s claim. I played a small part in this and it was a moment of genuine satisfaction with my work.

And whilst this proves that for the ultra-confident and determined there is still hope, for everyone else there is fee protection and with that still a way to win.