Most horror films start off with a gruesome murder that sets the scene for the rest of feature, but they could just as well start with a letter of investigation from HRMC. Both are the stuff of nightmares and likely to result in many a sleepless night.
You might think that tax investigations are solely for the likes of big business, benefit cheats, and the rich and famous, but recently HMRC has been on the war path, and it’s the middle classes that are being targeted. The number of criminal prosecutions has risen by 29% on last year, and is expected to increase 47% in 2014-15.
If you earn a second income, perhaps from a freelance job, a hobby or even selling on eBay, it can be all too easy to fall foul of the rules. See our guide on what you need and need not declare to the taxman.
Here’s what to do should the worst happen to you.
Find an experienced tax adviser
Tax is a complicated affair and having someone with experience to fight your corner will help ease your mind, and save you money in the long run.
Don’t assume it’s a mistake
The UK tax office has made some cataclysmic mistakes in its time, but don’t assume that its investigation into you is one of them. If HMRC is focussing its limited resources on you, it’s because it believes there is good reason, you need to take action.
Be honest
If you’ve made a mistake on your tax return or failed to register yourself self-employed (or register your business) be up front about it. Explain what when wrong, and why. Doing so now shows a willingness to co-operate, and may help you avoid a larger fine or criminal investigation.
Don’t destroy evidence
Remember the scene in Wolf of Wall Street where they start shredding financial documents? Don’t do that. These days most transactions are electronic anyway and HMRC has the powers to request information from third parties. Destroying evidence is only going to make it look like you have something to hide.
Seek further clarification
Tax inspectors are encouraged to work in a cooperative manner on both sides in order to resolve the dispute. If you are unsure why a certain question is being asked or why a particular document has been request, just ask. It’s important that you fully understand what is being asked of you.
Be proactive
Carefully check each response you receive and try to anticipate what they will ask next. Pre-empting their questions and providing record that you think might be asked for next, will show that you are being cooperative and may help reduce any fines imposed.
Dispute resolution
If you reach a deadlock with the taxman then alternative dispute resolution (ADR) might help. Here’s what the HMRC says about ADR:
“ADR provides you with the option of having someone who has not been involved in your dispute to work with you and the officer dealing with it. The person leading the ADR will act as a neutral third party mediator…they will work with you both to explore ways of resolving the dispute…”
Appeal
If HMRC has made a decision about your case that you disagree with, you may be able to appeal by asking for your dispute to be referred to an independent tribunal. Additionally, if that doesn’t go far enough, you can also ask for a statutory review.