This is the content of a draft letter prepared by HM Revenue & Customs (HMRC) for High Volume Agents (HVAs) to consider issuing to their clients, when approval is being sought for an amendment programme to eliminate unsupported estimated and round sum expenses.
The purely fictitious practice name A.N. Accountants Ltd has been inserted to protect the confidentiality of those firms who have signed an Memorandum of Understanding and been sent this draft letter by HMRC:
HMRC have recently contacted a number of tax agents who file tax returns which they consider to be at risk of being wrong. The agents selected submit high numbers of returns for clients resulting in tax refunds usually for those that work in the construction industry. This is part of an ongoing programme which will result in most agents who file high volumes of such returns who have not already been contacted being contacted in future.
A.N. Accountants Ltd were recently contacted as part of this programme.
HMRC’s concerns arise because they have checked a large number of tax returns in recent years for customers within the construction industry scheme. When checked many of the returns have needed adjustment because expenses claimed were not justified. HMRC have formed the view that the returns are likely to have been incorrect because self-employed workers in the construction industry often fail to keep adequate records of their income and expenses. As a consequence tax agents, at the request of their clients, often claim round sum or estimated expenses, for which no supporting evidence is held.
We recently had a meeting with officers of HMRC. The officers reviewed a number of our files and they identified cases where it appeared returns filed included expense items that were estimated and may be unreliable. They asked us to undertake a general review of all our clients returns.
We have identified that your returns include expense items that are estimated and may be unreliable. We have been asked to write to you to ask you to agree to A.N. Accountants Ltd amending the 2011/12 and 2012/13 returns filed by withdrawing the following estimated, round sum or identified non business expenses claimed.
(E.G.) Motor/Travel 2011/12 £ 2012/13 £
What happens if I agree to this adjustment?
If you agree your returns for these years only will be adjusted and you will be required to pay any additional tax and interest arising. That will be the end of the matter.
What happens if I do not agree to this adjustment?
HMRC have asked us to point out that if you do not agree to the amendment then it is very likely they will undertake a formal check of your returns.
A formal check will look at what evidence is held to support the whole of your return not just the item(s) referred to above (E.G. Motor/Travel). It will also check that all expenses have been incurred wholly and exclusively for the purpose of the trade.
If your records are incomplete so do not fully provide the necessary evidence to show that expenses claimed are allowable HMRC will consider your return to be wrong.
Generally speaking where following a check a return is shown to be wrong HMRC would seek to consider the accuracy of returns for earlier years.
They would also consider why the returns are wrong. If a return is found to be wrong because a taxpayer has not kept adequate records HMRC generally take the view that the taxpayer has failed to take reasonable care or has been careless. Under these circumstances HMRC could charge a penalty. The penalty could be up to 30% of the additional tax payable following the check.
Do we recommend you agree to the adjustment proposed?
The answer must be ‘Yes’ unless you are confident your records are complete and accurate and you have kept all these safely.
For the reasons set out above the alternative is likely to result in a formal check with all the work and cost that entails and very likely a much bigger tax bill than the amendment proposed.
What if I choose to move to a new agent rather than cooperate?
In order to provide consistency and fairness HMRC have given an undertaking to those agents and their clients who cooperate that they will contact those who choose to change agents. HMRC have told us that the current return for any client who decides to move to a new agent rather than cooperate will be risk assessed. This means there is a very high probability that the return will be subjected to a formal check.
What will happen if I fail to answer this letter?
We have given an undertaking to HMRC that we will report the outcome of our contact with clients within the next few weeks. If we get no response and have no reason to believe that we are no longer acting as your tax agent we will take it that you accept and agree our advice to amend the returns withdrawing the expenses shown above. We will advise HMRC that you wish to amend your returns by withdrawing the amounts identified.
Assurance required for future returns
As part of this exercise HMRC is seeking assurance that for future returns:
- We will ask you to provide an undertaking that you will comply with your obligations to maintain and preserve adequate business records to support the submission of accurate Tax Returns.
- Make these records available to us, your tax agent, when requested so we can be assured that your records are accurate and fully support the figures to be submitted.
- We are required to ensure you view, agree and fully adopt the completed returns before we submit them to HMRC. We need to do this by obtaining your written approval of each return.
- We are specifically required to give an undertaking that we will not submit a return in future where records have not been kept, if that expense amounts to more than 10% of income. That means in effect that you may be asked to pay more tax than you need or receive a smaller repayment if you fail to keep records.
Why Must I Keep Records?
Firstly you must keep records because as a self-employed person the law requires you to do so. HMRC can charge you a penalty if you fail to keep and preserve the records that you should. This means that you should keep an adequate record of your income when you get it and the expenses you pay out when they are met. You are required to obtain and preserve all the bills, receipts and invoices that evidence this record.
Secondly HMRC have a general rule that they will not allow any expense that cannot be evidenced. This rule applies to all but small and reasonable estimates. Even if you have paid out an expense the law puts the responsibility to show that you have on you.
You will find ‘A general guide to keeping records for your tax return’ on HMRC’s website at http://www.hmrc.gov.uk/sa/rk-bk1.pdf. This provides guidance on what records that you are required to keep and how long you need to keep them for. This link also provides examples for different types of businesses.
A.N. Accountants Ltd
This letter is a draft proposal prepared by HMRC. HVAs do not have to issue it to their affected clients and some have chosen not to; some preferring to meet with their clients face to face to explain the background to the amendment programme, some because of their feeling that the draft letter implies the subcontractor is only being targeted because of who their tax agent is.
Author: Guy Smith, Senior Tax Consultant on the ReSource Tax and VAT Consultancy Team.