Under the
self-assessment system it is your responsibility to send in a tax
return with full details of your income and assess for yourself how
much tax you owe. If you get your return in early enough then the
Revenue will do the assessment calculations for you, and they will
always check your calculations and correct your assessment for
arithmetical errors.
 Every year they
select a number of tax returns for further enquiry. The majority of
tax enquiries are handled by local district tax offices. They start
with a letter indicating what the tax inspector wants to know and
enclosing a booklet explaining how the enquiry will be handled.
Typically the opening request will be for you to send in all the
records which support the entries on your tax
return.More serious cases are
handled by the Civil Investigation of Fraud Offices (CIF), or by
the Serious Civil Investigation Office (SCI). They conduct very few
investigations each year and they are generally only interested in
complex fraud or situations where the tax evaded runs into six
figures. These enquiries are extremely serious and will invariably
start with a long interview. Only the SCI handle cases that may
lead to criminal prosecution. There is also a newish office within
HMRC called the Criminal Taxes Unit(CTU). Their remit seems to be
to disrupt criminal enterprises by taxing them and taking away the
incentive of tax free profits. Despite some alarming speculation on
some of the paid-sex message boards the CTU are not interested in
law abiding escorts.
The other group you
may come into contact with are the Joint Shadow Economy Teams
(JoSETS). They are a joint venture between the income tax and VAT
arms of HMRC and the benefits arm of the Department of Work and
Pensions. Their primary goal is to get people out of the shadow
economy and get them registered and paying tax. They generally seem
to visit premises and invite everybody to register or stop work.
Saunas and parlours in certain areas have been heavily targeted by
these teams, but I am not aware of any independent escorts who have
had dealings with them.
 Unregistered escorts
are more likely to get a bland looking letter from their local tax
office saying something like "I understand that you are
self-employed but I cannot trace your tax
details." |
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A tax investigation
will either start because you haven't sent in your tax return or
because you have and the Tax Inspector has some questions about
it.
There are two types of
enquiry. The most straightforward is an aspect enquiry. The Revenue
have a particular question about one aspect of your tax affairs,
and once they are satisfied the enquiry will be closed. For example
they don't understand something on your return and they want some
more details because they think it might be in the wrong box.
aspect enquiries are generally easy to deal
with.
 A detailed enquiry
involves them taking a thorough look at your tax return. The law
requires you to keep records of all the transactions that support
the entries that you put on your return, and the tax office will
want to look at those records to see whether your tax return ties
in with your records and whether the records are
reliable. A detailed enquiry
can start for a number of reasons. Every year a number of tax
returns are selected at random. Others will be selected because the
figures on them look wrong - the Revenue know what sort of gross
profit a country pub should be making on its food and wet sales,
and they will look at ones that are out of line with the norm. They
could have information from a tip off - possibly an ex- boyfriend,
a jealous rival, a nosey neighbour or a Suspicious Activity Report
arising from the Money Laundering Regulations. Or they could have
evidence that your lifestyle doesn't match your declared income -
they may know you had a swimming pool installed and bought a
classic car, although you claim to live on £12,000 per year.
Finally, sending your tax return in late could make you more likely
to face a detailed enquiry. |
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Let's take the
simplest case. You send in your tax return and pay your tax, then
sometime in the next 12 months you get a letter from your district
tax office saying that they are enquiring into your return and
probably asking you to send in all your accounting
records.
They can only ask you
to produce the records from which your return was completed. They
can't ask you to produce your husband's, partner's or grandmother's
bank statements, unless of course you've run your business through
granny's Post Office account. It also makes sense to have a
separate bank account and credit card for your business because you
don't have to produce your non-business accounts if they didn't
generate any of the information on your tax return. Ultimately if
your business records fall apart under scrutiny you may have to
produce your personal bank statements but there is no point in
handing over information right at the start if you don't need
to.
If you fail to produce
your records then a penalty can be imposed.
At this stage your
accountant will normally give the Revenue any relevant information
about how the tax return was put together and how the figures in
your books and records related to the entries on the
return.
The tax inspector will
first of all want to check that the return has been correctly
completed from the records. Do the income and expenses on the
return tie up with your books? Have you only claimed tax relief on
legitimate expenses? Are any estimates
reasonable?
 He'll then want to
see if the records themselves are reliable. Do they tie up with
your bank statements and credit card bills? If you've deposited
money in your bank account do the records show where it came from?
If you've paid expenses in cash then do the records show that you
actually had enough cash to pay them with? Do the records make
sense? Claiming hotel and travel expenses for 10 tours, none of
which made a profit doesn't make sense. Do the records tie in with
the other information he has? He may have seen your Field Reports
or possibly one of his colleagues may have made a booking to
establish your prices and availability, and then cancelled at the
last minute. Do the records show you have a fluctuating horde of
cash? Are the expenses supported by receipts? Do the records tie in
with what he knows about your lifestyle?If he cannot 'break'
the books then the enquiry will hopefully draw to a swift
conclusion. You may have to negotiate some adjustment if there are
some expenses he is not happy with. If he is happy with the records
there may still be a fundamental mistake in for example what you
have claimed. That could result in the Inspector deciding to open
investigations into earlier tax years. That could cause extra
problems particularly if your book- keeping was more hit-and-miss
in one of the previous years.
 If he can demonstrate
that the books are not reliable - which will often be because he
can show that you must have had other income which you have missed
out of your books - then he needs to establish what the true profit
must have been. At this point you are likely to have to produce all
your personal financial documents. The Revenue are likely to look
at unexplained money appearing in your private accounts, major
items you've bought but don't appear to have paid for, and try to
calculate how much cash you must have had to support your
lifestyle. They can also try a business economics exercise and
estimate how many clients you see a week and how much you must have
earned - although most reasonable tax inspectors recognise that
escorting is not the kind of business where this can be done
accurately. But they are more likely to try it with a sauna or
parlour where the flow of clients and average payment can be
measured and calculated.Hopefully by this
stage you and your accountant may be able to strike an agreement
with the Revenue about the additional tax payable. If you cannot
agree you can take the dispute to the General Commissioners who are
an independent body, rather like magistrates. They meet in private
so the hearing won't be published and they can't award costs if the
case goes against you. Few disputes go to the Commissioners but it
can sometimes be worth taking a case before them. If the
Commissioners get the law wrong then their decision can be
appealed, but their findings about the facts of your case cannot be
appealed. |
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Let's suppose you've
been in business for a year or so but haven't declared anything.
Then one day you get a letter making it clear the Revenue know
you're in business.
An enquiry proceeds in
much the same way. If you have a good set of records and know
exactly how much you've earned you may want to submit the missing
tax returns, and they may agree to allow you time to consult an
accountant and get your tax affairs sorted out. The Revenue will
want to look at your records and establish how much you have
earned. |
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What should you do if
you've been in business for a while but failed to register, or if
you've registered but under-declared your income, and you now want
to confess and put things right?
 First of all there
are powerful reasons for wanting to do that. The maximum penalty
for evading tax is 100% of the tax - that means if you're caught
evading £20,000 of tax then you could be facing having to pay
£20,000 in tax plus £20,000 in penalties plus interest on
the tax. But if you confess before getting caught, and co- operate
in reaching a settlement then you'll get a very much lower penalty
and by paying the tax earlier the interest will be
lower. The best advice is to
consult an accountant who can undertake to compile a full report to
the Revenue very quickly. He'll need all your records and your
complete co- operation. That way you'll get maximum for disclosure,
and co-operation which will reduce the
penalties. |
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There are three main
ways in which a tax investigation will get
settled.
 It's possible that
the Tax Inspector will be entirely satisfied with your tax return.
In that case he will simply issue a certificate saying his enquiry
is over, and he then cannot reopen it. That's it:
over.If there are minor
adjustments to be made, but no evidence that you have been
negligent or fraudulent, he may issue an assessment for the extra
tax. There will be interest to pay which will be back-dated to when
the original tax was due.
In more complicated
cases, particularly where more than one year has been investigated
and there is evidence of fraud or neglect, the Revenue can take
formal penalty proceedings. These are still civil (non- criminal)
proceedings and not to be confused with criminal prosecution which
can be instigated by the Revenue & Customs Prosecution
Office.
However in practice
even formal penalty proceedings are rare. Normally the taxpayer
will be invited to make an offer to settle to enquiry and in return
the Revenue will agree not to take penalty proceedings. This
creates a binding legal contract which the Revenue can enforce
through the courts if you fail to pay.
The amount of the
offer will be negotiated with the Revenue. It will always include
the unpaid tax, and almost always include interest. The negotiable
bit is the penalty on top. The maximum penalty is 100% of the tax
but it will be reduced on the following three
counts:
-
whether the initial disclosure was made
voluntarily - did you confess before they backed you into a
corner?
-
the size and gravity of the offence -
negligently evading £1,000 of tax is less serious than
fraudulently evading £20,000 every year for 10
years
-
the degree of co-operation with the
Revenue in conducting the enquiry
 What it amounts to is that
if you get caught evading tax, whether by deliberate fraud or just
by negligent procrastination, then you will always have to pay the
tax and the interest. If you take steps to regularise your tax
affairs before they catch you, and the amount of tax is modest, and
your failure to pay tax was due to negligence, and you co-operate
in sorting everything out, then the penalties will be minimal. But
if they catch you out after deliberately cheating for years and you
have to led kicking and screaming to a settlement, then you'll get
screwed. |
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 Beware of brown
envelope paralysis. There is a strange medical condition which
afflicts otherwise sane human beings. The symptoms are an inability
to open brown envelopes and a desire to lose them in cupboards,
under the settee and in the boot of the car. Whatever your tax
problems they are not going to get better by themselves. It's even
worse than men avoiding going to the doctor because there's a
chance we may have imagined our symptoms and even if we're really
ill we might get better naturally. If the Revenue are on to you
they won't go away, and if you have to settle with them you'll get
a better deal if you do it know. Take book-keeping
seriously. There is a school of thought that believes if you
haven't got any records then they can't tax you. The truth is that
if you have a set of accurate books then you can prove how much
you've earned and fight off the Revenue's extravagant guesses. And
if you've no records you aren't going to get tax relief on your
business expenses. Book-keeping is not difficult: some of the
dimmest people I've ever met have been accountants and book-
keepers. With a decent system anyone can do it. Don't worry you'll
be in the Sunday papers. The Revenue carry out around 250,000
enquiries every year. They have an enviable record of
confidentiality - which is why the ordinary tax staff are so angry
that their well deserved reputation has been damaged by some clown
sending unencrypted disks through the post. Tax enquiries are not
publicised. By far the bulk of tax inspectors are professional and
courteous in their dealings with taxpayers, and will treat you with
respect. Seek professional
advice. Even if you deal with your own tax returns I'd strongly
urge you to get professional help from an accountant if you find
yourself facing a tax enquiry. They tend to be time consuming and
therefore expensive but a good accountant should help get it
completed more quickly and ensure you get a fair outcome. Even if
you have done nothing wrong a tax enquiry can be very stressful and
worrying. A good accountant will help you sleep at night [hmmm,
that could have been better phrased!] |
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1. Do-it-Yourself
