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The taxman (or ‘HMRC’ to give him his full title) is conducting more tax investigations than ever before, and landlords are under increasing scrutiny. Tax investigations can take years (not months!) to resolve, and can result in eye-watering tax bills (after adding penalties and interest to the underpaid tax). Your accountant’s time can also run into thousands of pounds (and you thought their normal fees were bad!).The financial ‘hit’ can be life-changing … and not in a good way!The taxman looks for ‘tell-tale signs’ to single out the ‘juicy’ taxpayers who are likely to have significantly underpaid tax. Your accountant should therefore be doing everything possible to reduce the likelihood of accidentally triggering a tax investigation.This feature provides a few hints and tips to avoid a tax investigation in the first place:1. File your tax returns on timeThis applies to both personal and business tax returns. Filing late tax returns suggests you are disorganised – the taxman concludes ‘maybe your accounting records are also disorganised’ … and thus worthy of a review?2. Explain anything unusualTax returns, both personal and business, are processed by a computer that carries out analytical checks on the figures to look for unusual items.To avoid triggering a tax investigation, explain anything unusual when your tax return is submitted, using the white spaces provided. The taxman is far less likely to start an investigation if you have provided a plausible explanation to explain anything that looks odd, such as a big change in profit margins or much lower drawings by the owner.It is vital that your accountant spots these ‘unusual items’ for you and explains them – as this can satisfy a tax inspector so prevent a tax investigation.3. Don’t use a dodgy (i.e. cheap) accountantOk, so I’ve got a vested interest here … hands up! But, the taxman knows that taxpayers who use a reputable accountant are unlikely to submit fraudulent or negligent tax returns (individuals and companies). Stands to reason doesn’t it?A Chartered Accountant (‘ACA’-qualified) has passed the toughest accountancy exams possible, is regulated by the ICAEW, and has to pay for a (very expensive!) professional indemnity insurance policy to compensate a client if advice provided is negligent.The taxman also has a list of ‘dodgy accountants’ … whose clients strangely seem to suffer tax investigations more frequently than others!4. Landlords – don’t fudge the figuresIf your rental income is above £15,000 for the tax year, the taxman wants a breakdown of your expenses – for a good reason! Basic checks are performed to ensure that the figures you provide look reasonable (especially given the new requirement to declare the number of rental properties a landlord owns).5. Don’t work ‘for cash’What does the taxman look like? Young, old, fat, thin? If you’re going to do a job cheaper ‘for cash’ you’d better hope it’s not for a tax inspector. Do you know what all your customers do for a living?Make sure you do before you offer to work ‘for cash’ … you would be surprised how often tax inspectors start investigations after receiving a ‘discount for cash’ offer.6. Don’t do deals with ‘dodgy’ matesYour mate ‘Bob’ is being investigated by the taxman, and mentions that you lent him £10,000 to start a business. The taxman may want to ‘discuss’ with you where you got this £10,000 from, since your tax return only shows an income of £20,000.‘Bob’ may also be declaring expenses in his accounts that should therefore be income in yours … do the two tally up? If things don’t look right, the taxman may decide it’s worth looking into further.7. Stay ‘under the radar’The taxman has a dedicated hotline for ‘informers’ to call, as well as the HMRC website, to report suspected tax fraud (informers can do so anonymously if they wish). Have you got any jealous neighbours, disgruntled customers, or an ex-spouse you’ve fallen out with?Not all accusations turn out to be true but it could be the start of a tax investigation.8. Hang on in thereWith effect from 2007/08 onwards, the taxman only has one year after the date you file your tax return to enquire into it (assuming fraudulent or negligent behaviour isn’t discovered). So, mark the date in your calendar, once it’s passed, you can relaxPart 2 to follow … How to deal with a tax investigation
Vanessa Warwick Landlord and Co-Founder of PropertyTribes.com **If you have got value from Property Tribes, find out how you can support it in remaining a free to use community resource**
I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.
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I have also heard a rumor, which may be a myth, that sole traders like jobbing builders are less likely to be investigated if they declare net profit of a reasonable amount p/a, which C£10K is regarded to be outside the London area. I really don’t know how true this is.Rich