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What 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 pension certificate.

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!