CASE STUDY (WIN): HMRC chase a made up sum, for ten years

This case concerned a tax payer that came to us being chased for just over £3,100 due to her not filing a tax return for the 2004/05 tax year. She had no quantifiable information as to the events, which were short-lived, that occurred some ten years ago.

Our client had been in continuous employment before moving to our area. At some stage she found herself unemployed for a period of time. With the assistance of an employment agency, she began a self-employed cleaning enterprise which was short-lived as she ultimately ended up back in employment. The nature of her new job meant that an appointed accountant of her firm handled her self-assessment matters in relation to her activities with the company itself and the filing for the short time as self-employed was missed. The client, not fully aware of her obligations as a self-employed taxpayer, was satisfied everything was fine – after all no one was alerting her to her non-filing, and nobody was turning up at the door.

A few life events got in the way (as they do) and once the letters started landing these were viewed upon with fear combined an understandable reluctance to deal with the matter considering other events that had arisen. That said, a number of calls were made to HM Revenue & Customs and advice was given but ultimately she hit a brick wall once given a blank tax return to fill out for her self employment which was so short-lived that little evidence remained of it other than what was memorable.

She came to us and we looked at the £3,100 liability in more detail. It consisted of a revenue determination, surcharges, penalties and interest.

Revenue Determination

A revenue determination is an estimate that can be made if you haven’t sent in your Self Assessment Tax Return on time. HM Revenue & Customs (HMRC) estimate the amount of Income/Capital Gains Tax you owe. The determination also forms a basis for Payments on Account for the following return year.

There’s no right of appeal against this estimate. The only way to change the amount you have to pay is to send in your Self Assessment Tax Return for the outstanding year. In the meantime, you’ll still have to pay the amount due. HMRC may take legal action to recover the amount due and any costs. This could involve the removal of your goods to be sold at public auction or HMRC could take court action.

Action

We were tasked with filling in the missing pieces of the jigsaw. First we had to confirm an end date for the unemployment, and thus a start date for self-employment. Given the historic years involved it was unsurprising that such information was not available from the usual sources. HMRC had an “indication” of the date, but the records were to old to access. Luckily this “indication” matched our clients written timeline of events!

We then looked to see if any bank history would be available in order to confirm some transactions but as the legal requirement to keep such records had passed, the bank could not assist. The records were not retrievable.

In the absence of no physical records being available anywhere we knew it would be a tough argument to convince HM Revenue & Customs as to the viability of any numbers we submitted, however on the other side of the coin, HM Revenue & Customs would in turn have to put up a fight to nullify such numbers and either continue to support their revenue determination or replace it with a new assessment of the clients activities during the period and a new determination. Unless of course we used their tactics.

Process

With her agreement, we conducted a recorded interview with the client and covered some basic ground such as the work that she did, the number of clients that she had, her fee structures and so forth. Every time the client relaxed into the interview we sought to attain different responses by asking the same questions, but posed very differently. Yes, it was an exercise in tripping the client up and challenging her income and expense responses both financially. Answers such as “I earned £x.xx each week” would present a challenge in matching a calculation formed from another answer such as “I used to see x number of clients, x numbers of times a month and they would pay me £x.xx”. These are tactics used by HM Revenue & Customs Officers when conducting interviews and even the most honest person in the world can find themselves spun in circles by such lines of questioning and often leads to increases in taxes payable.

The transcript of the interview provided the basis of a formal statement, which the client certified as true to the best of her knowledge and recollection. The formal statement would become the evidence on which the tax return, numerically, would be based upon.

Result

We had plugged the gap as best as possible using accepted practices utilised by HMRC. We filed the return and it was accepted. The determination, surcharges, penalties and interest were rescinded and our clients liability reduced to £nil.

There is a legal requirement to keep certain records for seven years. We recommend keeping them forever, even if only in electronic format (so as to save space). It is paradoxical that HMRC is able to not provide older information, yet on the other hand it continues to pursue and chase a client for return that could only be based on information and records that the client herself was not required to possess by law due to its age. Surely seven years is enough time for HMRC to successfully demand, or perhaps even assist a taxpayer to deliver a return.

Yes it was ultimately the taxpayers fault for the non-filing and she fully accepts this but are we all not without fault at some point in our lives? HMRC thought that the client could fix the un-fixable, and obtain records that had no basis in law to even exist in 2015. Thankfully, fix the un-fixable we did.

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