One of the most stressful aspects of running your own business and having to submit tax returns annually is the dreaded HMRC tax inquiry.
In the career of an independent practitioner there is a good chance that you will be subject to one so understanding the key risk factors to reduce the risk of this is important as these inquiries can be expensive even with a clean bill of financial health.
What is an enquiry?
The income tax system for individuals and the corporation tax system for companies are based around self-assessment. This means that HMRC receives a series of figures only and no supporting paperwork is usually sent.
HMRC does not reveal the exact method of selection for inquiries but one of the first aspects is for their algorithms to look at expenses to see if they look in proportion to other businesses.
Additionally, HMRC is receiving more and more information electronically and therefore already has information on its systems to compare your tax return entries to. Omission of information already on its systems is usually an automatic inquiry, unless trivial.
The most common type of inquiry is known as an ‘aspect’ enquiry and this type is targeted at one or a small number of aspects of your tax return.
In this type of inquiry it is normal for the focus to just be on the area raised. A full inquiry is more involved and often requires the taxpayer/business to submit all the source accounting records. It inevitably results in a lot of questions and a substantial bill to deal with the inquiry.
It is important to note that it is very unlikely that the fees paid to deal with your annual tax affairs will cover a subsequent HMRC inquiry on the figures.
Therefore most accountants will offer an insurance policy to shield you against the cost. In this situation you should not face any costs to deal with the inquiry but if tax, penalties and interest is due it is unlikely to cover this.
These polices will also not usually cover any tax avoidance schemes or aggressive tax planning but separate policies may be available for those.
We are in a transition period of HMRC upgrading its systems to what it calls making tax digital or MTD. This new system will result in its receiving information quarterly and it believes this will increase tax revenues from more accurate disclosure of financial information.
For those with a suitably qualified accountant this is unlikely and those more cynical of the change believe HMRC will eventually change the payment system under self-assessment to more frequent payments than the present one.
It has become more and more important to engage the services of a specialist medical accountant who can advise on your position and often mitigate or extinguish your exposure to annual allowance charges.
Being subjected to an HMRC inquiry can be very stressful but the key thing is to avoid opening yourself to risk by ensuring that you supply your accountant with all the information they ask you for.
Keeping good accounting records is very important and is a requirement so make sure your systems are robust and ensure that you disclose all your financial circumstances to your accountant even if you think something may not be relevant.
Ian Tongue is a partner with Sandison Easson Accountants
Common areas for inquiry
Whilst not exhaustive, the most common areas for enquiry for a consultant are:
- Omission of savings income or capital gains.
- Omission of foreign income.
- Motor and travel claims.
- Conferences and meetings.
- Professional subscriptions.
- Employment status of secretary.
- High income child benefit charge.
- Ad hoc PAYE income.
- Pension Annual allowance charges.
Omission of savings income or capital gains
It can be easy to forget to supply this information to your accountant or assume the amounts are immaterial but this one area that HMRC do receive information from the banks and other financial institutions and therefore it is important that you send everything to your accountant.
If you have an investment portfolio it is important to supply your accountant with the relevant tax information as the portfolio may have income or capital gains without realising.
Omission of foreign earnings
With the increasing number of doctors working in the UK from overseas and HMRC having information shared by its foreign counterparts, this has become a relatively common area for inquiry.
There have been several amnesties and disclosure facilities for those that may have not realised that their foreign income needed to be disclosed but now these have largely finished HMRC will no doubt crack down on those who have not disclosed their income.
If you have come to the UK from overseas, your obligation to disclose your foreign income will depend on your circumstances and the amounts involved so it is important that you discuss matters with your accountant to ensure that you are disclosing all necessary items on your UK tax return.
Motor and travel claims
This was the hot topic many years ago and with the principles established in the ‘Samadian’ tax case from 2013, mileage claims have significantly reduced as the scope or ‘business travel’ became defined.
Therefore, if you have a higher than normal business use of your vehicle you will be increasing your risk of an inquiry. Always maintain a periodic mileage log that is representative of your normal pattern to support any mileage claim.
Conferences and meetings
This can be an area of challenge as many specialist courses are held abroad and therefore become a significant cost within the accounts. These expense claims are usually easy to defend if the trip was solely for business purposes but care should be taken with the amount to claim if there is a duality of purpose, for example a holiday is tagged on or you travel with family.
Depending on your specialty and type of work undertaken, your indemnity insurance and professional subscriptions may be your largest expense within your accounts.
As this is not common across other professions this can lead to HMRC asking questions. It is important that you supply your accountant with the correct details of your expenses and the periods covered in order that an accurate amount can be claimed within your private practice.
Employment status of secretary
It is important to note that it is not a choice for a secretary or person working for you to decide between being an employee and self-employed.
A challenge of employment status would look at many factors and on the balance of indicators would suggest a status.
As a minimum, you would expect there to be a contract in place and if self-employed this should be a contract for services. Discuss your circumstances with your accountant to ensure that you are not at risk here.
High income child benefit charge
For those earning more than £50,000 a year where you or your spouse are still receiving child benefit you may have to repay the child benefit in full or in part via your tax return.
It can be easy to overlook an amount being paid into perhaps a separate account or direct to your spouse. HMRC’s systems can link the payment of child benefit and the income of the household and therefore it is important that you inform your accountant if you are still receiving child benefit.
Ad hoc PAYE income
It is relatively common for consultants to carry out short term or ad doc work, such as university teaching, and often these payments are made under PAYE using a separate employment reference to your main employment.
As HMRC will receive an end of year report from all employers disclosing your earnings it is important that you supply the end of year P60 for all sources or a P45 if you have ceased the employment during the year.
Pension annual allowance charges
Much has been written about the unfair and onerous pension annual allowance charge.
HMRC is now starting to target doctors to check their annual allowance position. This area is most probably the biggest risk of an unexpected tax charge for a doctor due to the complexity of the rules and lack of timely information being available from NHS pensions given the tax deadlines.