happens if the Inland Revenue investigates into my tax affairs?
A colleague of mine was recently investigated
by the Inland Revenue and as a result had a tax liability
to pay, I have just completed my first tax return and I’m
concerned as to what the Inland Revenue enquire into?
Tax investigations are random, and some individuals
may never get an enquiry into their affairs. If you do,
in may not be as bad as it seems, in the majority of cases
the Inland Revenue are often only asking for proof of what
has been declared on your return such as an interest or
There are basically two forms of enquiry –
either an aspect or a detailed enquiry.
An aspect enquiry relates to only one or two
areas of a person’s tax return and the Inspector of
Taxes may just ask a single question relating to the tax
return such as requesting a personal pension certificate
to prove the personal pension payment. The majority of enquiries
will be of this nature and are straightforward to deal with.
It is worth noting that an Inspector cannot subsequently
enquire into any different aspect of your tax return than
those mentioned in his first letter, unless fraud is suspected.
A detailed enquiry will generally relate to
the accounts of the business. Here the Inspector of Taxes
is looking for a lot of detail to substantiate the entries
in the profit and loss account or the balance sheet.
Often an analysis of items claimed is all
that is required but sometimes more is requested. With respect
to the surgery expenses, it is fairly easy to prove the
expenses, as there are purchase invoices available for any
payments made. The only point to note is whether an expense
is a true business expense or not. Most expenses, in connection
with running the practice, are business expenses for which
tax relief is available. Areas for which tax relief is not
available include, some legal expenses and the private use
element of expenses.
Now turning to personal professional expenses,
specifically. Where the expense is purely a business expense,
there is no major problem in justifying the expenditure,
as purchase invoices are available. However, the problem
arises with expenses where there is an element of private
use such as motor expenses, home telephone and mobile phone.
It is very difficult to determine the exact business proportion
of the expenses but the Inspector of Taxes will normally
expect some disallowance for the private element. So, how
is the private proportion determined?
With regard to motor expenses, the expenditure
itself will be justified by invoices or if payments are
made by credit card, by the monthly statements. The business
use element is calculated by looking at the percentage of
business mileage. It is difficult to track every journey,
but what we suggest is that a test is carried out over a
month whereby all your mileage is recorded, clearly differentiating
between business and private mileage. From this record,
the business usage of your car will be established. Normally,
travelling between home and the surgery is considered to
be private mileage unless the doctor is on call. However
a locum doctor may be able to claim motor expenses to any
place of work as his home is considered to be his place
of business. If there is an investigation and this area
is being looked at, the percentage claimed is often challenged
and you need to be able to prove your claim.
Regarding telephone expenses, again the invoices
will justify the payment of these expenses and it is essential
to keep the breakdown of the telephone calls. It would be
useful again, if for one quarter, you try to identify the
business and private telephone calls. On this basis, the
business proportion of the telephone expenses will be established.
The final area where private element has to
be determined relates to professional use of home allowance.
If you use your home for carrying out work related duties
such as writing reports, or seeing patients, a proportion
of your home expenses may be claimed. We would emphasise
the necessity of keeping bills relating to the running costs
of your home. Alternatively, some accountants prefer to
claim a set amount per week, which is also acceptable. This
is an area, which is often investigated in detail.
Some detailed enquiries request that you submit
all your business related documentation, including invoices
and bank statements, so it is important to keep all your
records for at least six years.
The Inland Revenue is making more enquiries
and proper documentation is a must if you are to succeed
in a claim. Without proper records, the Inland Revenue just
disallow the expenditure or allow only a nominal amount.
This will result in additional tax to pay with interest
and sometimes penalties. The detailed enquiries may last
several months and there will often be significant correspondence
with the Inland Revenue. Therefore, keeping proper records
definitely helps to argue the case and above all to close
the enquiry quicker.
As a final note, the Inland Revenue have indicated that
tax returns submitted late, certainly in the last week of
January, will be more likely to be the subject of an enquiry.
So get moving on that dreaded paperwork!