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Contractor guide to what information their accountants should share with HMRC

Contractors receiving information requests from HMRC should understand that they are under investigation and contact their accountant or tax investigation insurance provider immediately. And they should also be particularly careful about what information they or their advisers hand to HMRC, as seemingly ‘innocent’ information from genuine contractors could be used by the taxman to build a case.

“The rules relating to disclosure to HMRC are complex,” explains James Abbott, tax partner at contractor accountant Abbott Moore. “This is one area where contractors should definitely not ‘go it alone’.

“If HMRC sends an information request to a contractor, then they are on notice that an inspector is looking into their tax affairs. However, HMRC can only request ‘reasonable’ information that can be used to confirm a contractor’s tax liabilities are correct. But it takes an expert to understand what qualifies as reasonable in any given situation,” he says.

Why HMRC might be seeking information

According to Abbott, if HMRC is asking for information there’s usually a reason. For example, the request may have been sparked by something in the contractor’s tax paperwork, such as in a contractor’s limited company corporation tax return or self assessment personal tax return.

“An inspector may feel that the contractor’s travel expenses are unusually high, or may believe the contractor isn’t declaring all of their income,” continues Abbott. “In these circumstances the inspector is likely to request company and personal financial records.”

In theory, genuine contractors trading legitimately should not fear an inspection; but in Abbott’s experience, particularly in the case of IR35 investigations, even if HMRC got it wrong it can take months and even years of expense and stress to prove it.

Information powers granted by Schedule 36 of the Finance Act 2008

Schedule 36 of the Finance Act 2008 granted HMRC significantly expanded powers. These allow it to ask for the information it deems as ‘reasonable’ to confirm that a taxpayer’s tax liabilities are correct,” says Abbott.

Schedule 36 of the Finance Act 2008 granted HMRC significantly expanded powers. These allow it to ask for the information it deems as 'reasonable' to confirm that a taxpayer's tax liabilities are correct

James Abbott, Abbott Moore

“This includes the right to inspect company records at the company’s business address. For most contractors, the company trading address is also their home. So, in theory, they could have an inspector knocking on the door when they are out contracting.”

But Abbott confirms he has rarely seen HMRC resort to such tactics with contractors: “The information request is usually initiated by an informal phone call or letter. Despite the informal nature of this contact, contractors should not immediately respond to a letter, or be drawn into a conversation over the phone. They should politely inform the inspector that their accountant will deal with the enquiry.

“I fielded one call when an inspector was trying to reconcile some rental income that did not appear on the contractor’s Self Assessment Tax Return.

“We had an informal discussion by phone during which we discovered that the inspector was looking at another taxpayer’s records who shared the same initial but with a different name. As a result of this informal intervention, the investigation was halted before it got off the ground.”

The importance of securing professional assistance

Appointing an expert to deal with the information request from the outset can make a huge difference to how the investigation pans out. Abbott explains:

  • A professional will ensure the case is handled correctly from the outset and maximises the chances of the enquiry being swiftly dealt with and closed
  • An expert will understand what information the contractor is bound to give the inspector, and what is not reasonable.

“HMRC does go on fishing expeditions and asks for information that it is not entitled to,” highlights Abbott. “In response to a request, the contractor’s adviser will weigh up what should and shouldn’t be shared.

“By providing more than HMRC is entitled to you might close the investigation quickly. Alternatively, it may offer the inspector the opportunity to raise even more queries.”

Determining what is reasonable requires expertise and experience

What might be reasonable in one case won’t be in another. If a limited company is being investigated because the inspector believes the expenses have been inflated, requesting a contractor’s personal bank statements might not be reasonable.

But if the contractor was being investigated because the inspector believed that they were channelling fee income directly into a personal account, then expecting to see personal bank statements would be reasonable.

“HMRC has an important role to play in ensuring everyone pays the correct level of tax. However, this does not mean that it can ride roughshod over taxpayers’ rights,” observes Abbott.

He concludes: “Involving an accountant or tax expert right from the outset will maximise the chances of contractors responding promptly and accurately to an information request and then closing any investigation before it gains momentum.”

Published: Sunday, 2 September 2012

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