Tax Tip of the Month
July/August 2010
Watch out: there’s a taxman about!
The one thing that almost everybody does, in connection with the tax affairs of any business they are running, is also the one thing they shouldn’t do: open their big mouths when the VAT or PAYE Inspector is about.
Why is this such a bad idea? Well, it’s a bit akin to taking on Muhammad Ali in a boxing match. You, as the business owner, are likely not to be a tax expert (unless your business is tax advice, of course). The Inspector, on the other hand, is not only trained but is probably highly specialised in his own small area of taxation law.
So if he is trying to make some tendentious point by leading you into giving the right answers, he can easily do that without you suspecting anything.
“But surely,” some of our more naive readers will say, “a PAYE or VAT inspection isn’t meant to be a fight, or confrontational in any way? Look,” they’ll say. “It says in the Revenue’s material that it is here to help you.”
Well, that’s certainly the point of view it puts forward in its documentation, but remember the Revenue also refers to its victims as ‘customers’, which just about indicates how accurate this picture is that it is trying to build, of us all being jolly friends together.
The reality, of course, is quite different. The purpose of the taxman’s existence is to extract as much tax as possible. That may seem like an obvious comment, but there is a lot of propaganda out there about the Revenue only wanting the “right amount of tax”. This, of course, is in any event an entirely mythical concept, but more importantly the reality is that this statement is simply not true.
Anyone who deals with HMRC on a regular basis, rather than only very occasionally, is unlikely to be in the grips of this particular illusion.
Let’s be a little bit more concrete, and give an example. Let’s say the PAYE Inspector has visited your offices and has seen that you pay some individuals gross as subcontractors. His ears prick up at this (he’s only human – if that) and he sees a possible opportunity of slapping an assessment to PAYE on all the payments you have made to these people for the last six years.
As the Revenue rightly points out, it’s not what you call these subcontractors that determines their tax treatment but whether they are genuinely independent self-employed people or actually employees.
So the Inspector leads you down a carefully prepared primrose path. He asks you angled questions about how these people work for the business, and notes down particularly carefully those answers which favour an employment status for the individuals concerned.
He thanks you very nicely for you cooperation during his visit and leaves, apparently in a glow of mutual friendship and cooperation.
Then, a few days later, the bombshell letter arrives. He has added up all the amounts paid to your subcontractors, calculated PAYE and National Insurance on the whole lot and then multiplied it by six on the basis that you have probably been doing the same thing wrong for as long as he can assess you.
That’s just an example, of course, and there are many other ways in which the expert can trip up the uninitiated.
So the tip in this article is a very simple one: when the inspection happens, stay away. And not just you, but anybody in your business who knows anything about it.
We will just about allow a junior bookkeeper to show the taxman where the records are, but even he must be told to meet all questions with a blank “I’ll have to ask the boss” type answer.
This advice actually comes up with a lot of resistance from the taxman in practice. Some of them have been known to tell you that you are legally required to be there.
Rubbish!
Perhaps we are moving more and more towards a police state, where the taxman has the right to interview his victims and you have no right to silence. But we are nowhere near there yet. Meet any such pressure from the Inspector with a firm refusal and, if he persists, ask him to state his authority for requiring your presence by reference to the precise statutory provision, that is chapter and verse of whatever Act he says he is relying on.
In our experience, that question tends to bring the matter to a close.
