So what can you do if you are picked? And just what happens? Once you're in a dispute, however small, the main advice is to hire a professional tax advisor if you don't have one already. Hopefully, you'll have Fee Protection insurance so that their fees will automatically be covered. “If we hadn't had professional expertise through our insurance, it would have been extremely traumatic, difficult and expensive,” says Mr Edwards, an MD whose small retailing company was the subject of a full tax investigation. You'll probably be asked to supply detailed records which can include books, records, invoices, export documentation, vouchers, till rolls and receipts as well as personal bank and credit card statements. These had better be well organised and easily accessible. Excellent records can make all the difference in determining the outcome of an investigation. A VAT or tax inspector may ask to see records for the past 6 years-or longer in the case of criminal investigations. Finding these records can be one of the worst headaches in an investigation. According to Mr Edwards, “The worst bit wasn't the questions they ask you, but trying to find everything they asked for.” In his case, poor record keeping made the investigation much tougher. “They asked for a lot of things I hadn't realised you were supposed to keep,” he says. The investigation process, and the time it takes, depends on the extent of the investigation. For VAT investigations, there will normally be an initial visit by an inspector who will meet with you to discuss your business and ask to look through your records. The inspector then has up to one year to present their assessment. Asking for a reconsideration of the assessment can take another 3 or 4 months and if a formal appeal is requested in the courts, this can take up to another year. It's worth requesting a reconsideration as 40% of these are accepted, according to the National Audit Office, but Revenue & Customs win a very high percentage of court appeals. Red Letter day For Revenue inquiries you will first be presented with a letter with a request for information and the onus is on you to provide it. They may also request a meeting (or several). In Mr Edwards’ case, there were three meetings over 16 months before the investigation was concluded in his favour. Be encouraged–approximately 50% of all Revenue investigations result in nil settlements. The maximum adjustment for VAT or tax due is 100%, plus 100% in penalties and interest. Penalties can be reduced by good co-operation. And where fraud or negligence can be proven, any professional fees in dealing with the investigation are not tax deductible.
Although you'll never be able to protect yourself entirely, there's a lot you can do to minimise the risk of a tax investigation. But remember, if you are picked, it's important to get yourself a good advisor-and be prepared to fight!