Take Away Cross Tax Case – HMRC getting lazy, or just unskilled?
Croner Taxwise were asked to takeover this cross tax enquiry case by the accountant after 15 months as HMRC had confirmed their decision was that sales had been understated by £380,000 over 5 years and that the appropriate penalty should be between 50% and 100% of the potential lost revenue on the basis that they considered the clients actions to be ‘deliberate with concealment’.
HMRC conducted an un-announced visit following which declared sales had increased by 75%. The clients and accountant had explained this was due to a combination of factors, including improved management, refurbishment of premises and closure of local competition, however, HMRC had dismissed these explanations in favour of a decision based on extrapolating the increased sales back over previous years resulting in additional liabilities to income tax, VAT and penalties totalling £190,000.
We met with the clients and accountant to review the evidence and established what further evidence was available. We insisted HMRC issue a detailed ‘View of the Matter’ letter to explain the evidence upon which they were relying, as they had yet to do so, and challenged their failure to follow their own guidance with regard to recalculating profits (EM3505) and considering the private side (EM3520).
Over a number of months, we undertook detailed analysis of the records and collated further evidence to demonstrate that HMRC’s decisions were premature and failed to take account of ALL of the evidence available. We presented this evidence to HMRC with detailed counter-arguments to all of HMRC’s concerns including cash: card ratios, gross profit rates, employee costs and till records over the years concerned.
We approached the suppliers to the business and demonstrated that purchases were accurately declared during the years concerned, with no scope for the increased purchases required to support the levels of sales HMRC were asserting.
We reviewed employee costs to demonstrate these were reasonable and cast doubt on evidence HMRC had obtained during the enquiry after they had approached an ex-employee with a potential grievance.
Ultimately, HMRC were unwilling to vary their decision or to engage in discussions on areas where their thinking was clearly illogical and contrary to the further evidence we had provided. As HMRC had issued decisions for all taxes and penalties, we opted to proceed with the Statutory Review process where the matter is referred to a senior inspector outside of the management chain of the HMRC case worker dealing with the case, knowing that Alternative Dispute Resolution (ADR) would be the next step if required. If we had not succeeded with the statutory review, ADR would have enabled us to have a mediated meeting with HMRC where the case worker would be accompanied by a senior officer. In the event, ADR was not required.
As circa 75% of Statutory Review decisions are upheld, we understand that to get the best outcomes you have to prepare and present the evidence, including undertaking work that HMRC may have been unwilling or reluctant to do. We provided HMRC with a comprehensive, 17-page response detailing our counter-arguments to each issue and the evidence in support for consideration by the Reviewing Officers.
The outcome was that the Reviewer upheld the appeals and dismissed all of the decisions issued in full.
From our perspective, the outcome was an excellent one which justified the time invested in working with the clients and accountant to collate all of the available evidence and undertaking a detailed consideration of it.
In the vast majority of cases, we succeed in working collaboratively with HMRC caseworkers to reach agreed outcomes, however, very occasionally that is not possible for a variety of reasons. Where that happens it is vital to maintain an evidence-based approach to ensure clients do not feel compelled to accept compromise settlements simply because HMRC issues large, estimated assessments based on inadequate evidence that would not be upheld on Review or at Tribunal. Where HMRC caseworkers adopt an unreasonable or ‘broad brush’ approach, they must be challenged to work their cases to a higher standard, and urged to follow HMRC’s guidance and their Litigation and Settlement Strategy.
We should always play our part by undertaking our work to the highest standard from the outset to maximise the prospects of getting the desired outcome for the client.
If you have a case like this, are having difficulties with HMRC and would like to speak to one of the consultancy team please email firstname.lastname@example.org or call the team on 0844 728 0120