Money News
Taxpayers could do more, when preparing their tax returns, to avoid inadvertently putting up red flags that could attract an HM Revenue & Customs enquiry says CCH, the accounting and tax information provider, part of Wolters Kluwer UK.
Last year HMRC netted £667.4 million from self-assessment tax enquiries into individuals, a 148.9% jump on the previous year, and £415.3 million from enquiries into businesses, a 34.8% increase on 2005-06. According to CCH, HMRC selects many of its targets for enquiries by using a risk programme. This identifies what it believes to be anomalies on tax returns. Tax returns that are prepared without bearing this in mind may attract lengthy and expensive enquiries.
Neil Tipping, Senior Consultant, at CCH, comments: "The risk profiling software used by Revenue & Customs has become much more accurate at identifying problem areas on tax returns in recent years. Coupled with the increasingly proactive stance taken by HMRC on compliance, taxpayers need to be aware of which areas on their returns to give extra attention to.
"Fruitless enquiries could be avoided if taxpayers understand the issues HMRC views with concern, thereby avoiding putting up red flags. They can pre-empt an enquiry by providing enough information to save the curiosity of the Revenue."
According to CCH, the growing complexity of the Government's tax system over the last 10 years, which has seen its tax guides (The Red and Green) swell to 37,407 pages, more than treble the size in 1997, is making it much more difficult for taxpayers to complete their returns accurately.
CCH considers the following to be some of the major danger areas for ordinary taxpayers.
1- Owners of buy-to-let properties offsetting improvements to a property against taxable income. Only repairs are tax allowable, but the distinction between 'improvements' and 'repairs' is problematic.
2- Undeclared eBay trading is an area of growing interest for HMRC. This is a challenging area for taxpayers to get right because personal possessions can be sold on eBay tax free, but buying items which are later sold on at a profit is taxable trading. HMRC uses a search tool to look for high volume e-bay traders.
3- A large bonus paid in one year which fails to generate any investment income the following year. HMRC will be aware of large bonuses through PAYE and may view it as odd if a very low level of investment income is subsequently disclosed.
4- Income or capital gains from overseas property may be liable to tax in the UK. If taxpayers are UK-domiciled, they will usually need to declare income/gains generated overseas on their self-assessment return.
5- Omission of information on income available to the Revenue from a third party source such as offshore bank accounts.
For businesses the following will likely draw the attention of HMRC
1- Large, unexplained differences between the current and previous year's accounts including: Reduced gross profit rate, increased wage bills, increased debtors and increased repairs expenses.
2- Wages paid to the spouse of the business owner that HMRC might consider inappropriately high.
3- Owner's drawings from the business appear low because the owner has netted off capital introduced to the business e.g. undeclared cash sales which have been used to fund living expenses.
4- Claiming expenses that are not tax deductible. This is a common area of risk as many business expenses are tax allowable but some, like entertaining clients, for example, are not.
5- A sole trader using a work van at the weekend for non-business purposes. Small traders who make use of their vans at weekends for non-business purposes became liable for an additional £1,200 in tax from April 07, but some sole traders will try to claim that the personal use of their vans is insignificant.
6- Use of round numbers - which to HMRC look like estimates.
7- Failure to enclose a full copy of the accounts when the tax return is filed. All too often, tax returns are filed without accounts, immediately reducing the amount of information available to HMRC and the perceived level of transparency in which the taxpayer is communicating with HMRC.
8- Substantial goodwill valuations when transferring unincorporated trades into a limited company in order to crystallise a substantial gain, take advantage of capital gains taper relief and create a substantial in-credit loan account balance.
25 January 2008 © Moneyextra.com
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