In March I outlined some preventative measures you can take in
advance to minimise the pain of a tax enquiry. This month I explain
how it is still possible to limit the financial damage once a tax
enquiry is under way.
A key part of the tax enquiry into your practice accounts is the
meeting between you and the investigating Inspector. This is where
your performance can significantly influence the Inspector's
approach and can have a bearing on the final amount you pay at the
conclusion of the enquiry. Unless you are very lucky you will have
to pay up something at the end of the enquiry. An adjustment to
your accounts is likely to generate additional tax, which will
carry interest and at least a small penalty. Even if the Inspector
finds nothing at all to warrant an adjustment you will have to bear
the costs of paying an adviser to help fight your corner. Going
into the ring alone against the Inland Revenue is extremely
foolhardy.
The investigating Inspector normally requests a fact-finding
meeting early in the enquiry process, shortly after he has examined
the practice accounts. If the Inspector has technical queries about
how the accounts were constructed from your records those issues
should be resolved with your accountant before you agree to meet
the Inspector.
You are under no legal obligation to attend a meeting the
Inspector of Taxes, so you can decline his request if you wish.
Some advisers prefer to conduct the entire enquiry by
correspondence, but this approach can lengthen the process and add
to your costs. Before you attend a meeting you need to be confident
that you will be able to think on your feet and not lose your head
under pressure. Think back to your interview for Dental School,
that was scary but you prepared well and passed. The same applies
here; preparation is the key.
Remember the aim of the Inspector is to prove that there is some
flaw in your business records, which will allow him to reconstruct
your accounts showing a higher profit figure. An alternative line
of attack is to undermine your own honesty by demonstrating an
omission from your tax return. If he finds an error or omission the
Inspector can recalculate your tax bill for the five previous tax
years assuming that the same fault applied in those periods. Thus a
relatively small adjustment for the year under enquiry can result
in a large sum being paid over to cover several tax years.
You should not meet with the Inspector until he has sent you a
Code of Practice leaflet. The particular Code of Practice issued
gives you an indication of the seriousness of the tax default
suspected. Normal local tax office enquiries are conducted under
Code of Practice 11. If you receive a Code of Practice 8 or 9 you
should seek the assistance of a tax investigations expert without
delay, as the Inland Revenue Special Compliance Office will be
involved, which could mean they suspect serious fraud. If the
Inspector does not issue a Code of Practice leaflet he is either
diverting from Revenue practice or he could be considering a
criminal investigation, in which case you will need legal
representation.
The next step is to ask the Inspector for an agenda covering the
main areas to be discussed. This is not a list of the precise
questions to be asked, but it should be specific to your case and
include all the major items. The agenda will allow you to focus
your preparatory work. From my experience the Inspector's questions
will fall into four broad areas: cash control, private fees, the
practice expenses, and personal matters. I have listed below some
typical questions asked of Dentists during a tax enquiry interview
together with an explanation of what the Inspector is trying to
establish.
Cash queries:
What is the average amount of cash in hand in the
surgery?
The Inspector may construct a cash flow model from your business
records to see if a negative cash position is ever encountered.
Negative cash indicates the accounting records are clearly wrong.
Any answer you give here will be taken as applying consistently
week on week. So if you don't know precisely what the figure might
be, do not give an estimate.
How do you work out how much you will
bank?
This targets the same answer as above, i.e. the level of the
regular cash float held.
Are any cancellation charges made?
Such charges are not generally recorded on treatment records so can
be an easy source of undeclared earnings, especially if they are
paid in cash.
Private fees:
What proportion of the GDP patients are
private?
This is very important as private fees are considered to be more
profitable and easier to hide. Are private patients' appointments
distinguished in the appointment book? The Inspector may try to
estimate the time available for private work by calculating the NHS
work and assuming balance of surgery hours are devoted to
profitable private work.
What records are kept on a patient's
treatment?
The more records you have for each patient the more difficult it is
to charge for a treatment that is not recorded. The Inspector may
well try compare the appointment book to patients' records.
Do you have a consistent fee structure?
Recall when the current fee structure was introduced. What changes
have been made over the last five to six years? Are discounts ever
given for family or friends? Inspectors have been known to assume
the current treatment prices have applied for the previous five
years.
Are your fees the same as other GDPs in the
area?
If you say 'yes' the Inspector will use the most unfavourable
comparison to reconstruct your GDP profit figure.
Practice expenses:
How do you keep your patient base?
A large throughput of patients will affect the practice
profitability. You may spend more on advertising or patient
reminders than similar GDPs.
Do you suffer any unacceptable level of
wastage?
What are the levels of wastage? If you do not have specific figures
on this, don't guess but offer to provide an analysis at a later
date.
What do you do with waste materials?
Do you get any additional income from selling metals for scrap? If
so do you get paid in cash by the scrap dealer or by cheque? What
account is that money paid into?
Personal:
Do you have any other sources of income?
Be honest here and recall any small amounts you receive however
irregularly. Do you let out your holiday cottage, receive travel
expenses for attending committee meetings, or write journal
articles for a small fee? Even if you believe that the income is
not taxable you should declare it at this stage.
Tell me about your hobbies?
The Inspector is trying to gauge whether your life style is
supported by the amount you draw from the business plus the other
declared sources of income. If you have habits that can potentially
generate cash, such as competition prizes or gambling, you should
declare them even if any winnings were in the distant past.
How do you normally pay your domestic
bills?
A payment by cash is less traceable and the money must come from
somewhere. If the cash drawings from your private bank account,
don't cover the extend of your household bills the source of cash
could be undeclared earnings.
How do you take your drawings?
This means by cash, cheque or bank transfer and how regularly. A
low level of drawings compared to your private expenses could
indicate that patient fees are diverted to your pocket rather than
through the practice accounts.
Have you had any windfalls, gifts or legacies in the
year?
The Inspector is trying to block the classic excuses that are used
when an unexplained cash receipt is found in your bank or deposit
account. If you have received gifts of money, or loans from friends
or relatives be precise as possible about the dates and
amounts.
This gives you an idea of the areas you need to research in
advance of the meeting. You also need to bear in mind the six
golden rules for an interview with the Inspector of Taxes:
* Keep cool head and take an adviser or at least a note taker
with you.
* Give concise clear answers, don't blather out information that
is not asked for.
* If you don't understand the question, ask for clarification
rather than guess the Inspector's meaning.
* Do not give an approximate or estimated answer. If you don't
know precisely say so, and offer to provide details following
further research.
* Never, never lie. If you have difficulty answering a question
ask your adviser