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Take The Offensive To Prevent The Tax Man Calling

Challenging HMRC’s Calculations – Why Wait For The Bad News From HMRC?

When you receive the request from HMRC to explain certain figures being presented in your accounts it is possible that you have a long period of waiting ahead of you after you have submitted the necessary information. This period can extend to months, even several years, during which you have no idea what HMRC are thinking or whether they really understand the figures you have supplied. Challenging HMRC’s calculations is much easier if you are prepared.

For example, a business was asked to explain its income and associated corporation tax liabilities over a number of years. Documents were submitted and within a short period of time a criminal allegation of £10 million tax underpayment was received from the tax authorities.

At this stage it was necessary to have the business independantly examined. Its owners couldn’t understand why HMRC thought such a lot of tax could be owed over only a handful of years. The business asked its auditing firm to have a look.

An Independant Challenge To HMRC’s Calculations Is Key!

The business was challenging HMRC’s calculations of course. The initial review by the auditors revealed that fundamental errors had been made by HMRC assessing the potential revenue and associated profits. Even if HMRC’s allegations were correct, the underpaid tax would have been a quarter of the alleged sum outstanding. Challenging HMRC’s calculations swiftly is essential if they are wrong!

Further detailed calculations revealed that the logic behind HMRC’s allegations was correct, that corporation tax has not been calculated correctly and that there was potential for underpayment. The auditors calculated that a lower sum of £2 million might be owed.

Appointing Appropriate Forensic Advisors Can Help

The business could still not beleive that even this reduced amount was owed to HMRC. It had experienced dreadful cash flow problems and felt that the low levels of corporation tax that they had paid properly reflected the low profits being generated. They lost faith in their accounting advisors and appointed Mark Jenner & Co Limited forensic accountants, who specialise in fraud, money laundering and tax disputes, to investigate the situation.

It turned out that the business had been making adjustments to the year end accounts that had the effect of reducing the reported profits and associated corporation tax. However, this was only part of the story.

The reason for making the adjustments was stimulated by the poor accounting system being used, that had failed to properly record and allocate a substantial quantity of costs being incurred. The business owners, thinking that profits should be low, had been making vague assumptions accordingly.

When the full picture was taken into account, the business was indeed loss making and should have been owed money by HMRC! However, by not accounting properly in the first place they had the much harder task of challenging HMRC’s calculations.

Be Ready For Battle

In this case, the problem had been caused by the business owners’ negligence. Otherwise they had done nothing wrong. They needed to sort the problem of course, but also to assess exactly what the true position should have been with supporting evidence. The earlier this is done, the fewer sleepless nights and stressful days for the business owners!

At Mark Jenner & Co Limited forensic accountants we see the full range of problems. From outright tax evasion, through arguable tax avoidance measures to situations where HMRC has simply assumed the worse and got it wrong! In every case, an independant examination using common sense has resulted in a lower tax bill in the end. There may be tax to pay, but make sure it is the correct amount.

Some of the cases we handle arise because the client realises mistakes have been made, often by remote subsidiaries or errant managers. In these cases it is best to get a handle on the scale of the problem quickly, quantify the tax that should be paid and challenge HMRC’s calculations, offering the solution and thus avoiding the typical scenario where assumptions are made resulting in criminal allegations or onerous penalties. An early offer can usually avoid these.