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The number of tax investigations is going up-and so is the use of risk assessment to identify which companies should be examined more closely. We asked the experts what you can do to lower your risk of an investigation.
The last thing in the world Michael Polledri was expecting was a VAT dispute. As MD of Charterhouse Mercantile Properties, he had never had any disagreement with Revenue & Customs over which of his properties were liable for VAT. But then a new inspector came along who challenged the status quo, saying that VAT should have been charged for rental of an undeveloped site. Polledri had to make a scary decision.
"The easiest thing would have been to hold our hands up and say, OK, we'll charge the VAT,” he explains. "But that would have cost us £100,000 in back taxes. Fortunately, we had an insurance policy which paid for professional help in the event of a dispute so we decided to fight rather than settle."
Polledri first lodged an unsuccessful appeal with Revenue & Customs and then had to take the case to an independent tribunal-which he eventually won. The entire process took two years, an experience he never wants to repeat. "It was a very long, drawn out process and, of course, during that time the tax clock is ticking. It cost us thousands."
A VAT or Revenue inquiry can happen to anyone-you can be chosen at random, having done nothing wrong. Currently, a company has a 1 in 40 chance of being the subject of a Revenue tax inquiry sometime during the year. The likelihood of a VAT investigation is significantly higher. Whether you're facing an inquiry on a single aspect of your return or a full investigation, the process is disruptive, stressful and costly. And the bad news is, the number of investigations is about to increase. So just why is this happening?
According to Neil Hamper, head of the Federation of Small Business taxation unit, it's because the Government is strapped for cash in a difficult trading year. "It would come as little surprise if officials are being urged to raise revenue as early as possible and tighten up on their enforcement regime,” he claims. Falling yields on recent investigations have also put pressure on Customs & Excise and the Inland Revenue to 'claw back' missing revenue. A 'get tough' policy is in place, which will affect everyone, not just the fraudsters and other tax dodgers.
Revenue & Customs has been tasked with producing more than £2bn per year in additional VAT revenue. In 2002, the Revenue's goal was to undertake 45,844 full tax inquiries into businesses. In the years since this number has increased. Additional tax inspectors have recently been recruited to help get through the investigation workload more quickly. And there is a growing use of risk assessment profiling within both tax authorities to target those businesses that are most likely to be non-compliant.
Risk assessment is nothing new but the tax authorities are getting much better at using it. There is even a specialist risk assessment unit within the Inland Revenue, called Service Delivery Support, whose job is to look at ways of identifying risks and to make sure that local tax districts are focussing on 'high risk' companies for their inquiries. According to a spokesman from the Inland Revenue, "We can't look at every single return which is why we use risk assessment to highlight where there is the greatest risk of tax loss. I helps us to better focus our resources."
Within Customs, so-called 'SIFT' teams go through risk assessment reports to decide who gets a visit from the VAT inspector. Customs claim to have one of the best VAT risk systems in the EU which is used "to task people and other resources to be deployed in such a way as to achieve the optimal balance between enforcement and support to businesses." They claim there is no single factor, but rather a combination of factors, which determine whether a company is considered high risk.
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