Reflections on a Taxing Month by Gary Axe

Reflections intends to give you an insight into a few of the more interesting issues we are currently addressing. This section will be updated with new articles on a regular basis. To receive notification by Email subscribe to our reminder service.

Inheritance Tax pitfall  

 From time to time journalists consult us. They generally ask questions about the current tax regime, or are seeking to understand the tax effect of the situation they are describing in an article.

Last week a broadsheet paper was running an article about Inheritance Tax planning. The writer telephoned to ask why a number of steps taken by an individual would mitigate his Inheritance Tax situation.

My guess was that the gift was made out of a desire to provide for his grandchildren with no intention to mitigate Inheritance Tax. As there was no Inheritance Tax effect the alternative was that the taxpayer either had not taken any advice, or had been given bad advice.

The journalist had no knowledge of the subject’s other assets and, working in a vacuum, it is difficult to see what could have been done to help the taxpayer.

The case of the missing invoices.

The client, in the rag trade, was making unrecorded sales from "cabbage" (waste material from the end of a roll of cloth). Customs and Excise raided the premises with a view to prosecution and found that invoice books had many pages missing. They contended that some 1300 missing pages represented substantial unrecorded sales from "cabbage". 

We were able to show, from the records they had impounded, that some of the missing invoices had been used as a notepad with messages such as "no milk today thank you" inscribed thereon. Having been able to cast doubt on the Customs and Excise theory we were then able to reconstruct the amount of missing sales which was modest, as it related only to the small volume of off cuts available. It was however something of an uphill struggle with the client scoring a significant own goal. 

The moral of the story is that slack practices can rebound against you -- business records should be used only for business purposes and any "spoilt" documents should be retained to show they have not been used illicitly.

DIY Kit Cars: DIY Tax Planning

An inventive client hit on the idea of buying motor vehicles and tractors in parts which, when described as purchases of spares, could be claimed as an immediate accounts deduction. The protracted writing down allowance procedure for capital allowances on the assembled vehicles could therefore be avoided. This came to light when he sought our advice on claiming VAT input on the purchase of his Porsche on the grounds of this was used for business transportation. We ruled this out, explaining the impact of the recent Lamborghini case, and persuaded him against pursuing the kit car capital allowance avoidance procedure.

The following year an Inland Revenue self-assessment enquiry resulted in no revisions being made and our client was relieved that our advice had been taken just in time.

We are always pleased to hear of innovative ideas or questions from clients but it is essential to have our input at an early stage. A 10-minute discussion to rule out an obvious misconception is far cheaper than the fire fighting exercise of a full-blown Inland Revenue investigation.

A Question of Self-respect.

In many investigation cases we are aware that human nature encourages our clients to "see what they can get away with". This, coupled with the perceived loss of face of having to admit to the Inland Revenue or to current advisers that the whole truth has not previously been disclosed, is a dangerous mix in any Revenue investigation - especially if this is with Special Compliance Office.

Out of the blue, a client was challenged by Special Compliance Office and we were brought in from the outset. He was adamant that there were no irregularities in his company but we pressed him, as we knew it was rare for Special Compliance Office to make a mistaken challenge. Eventually, just prior to the meeting with the Revenue, he admitted that he would occasionally take monies from petty cash and describe this as postage. On this ground alone we were able to admit to an irregularity (without specifying the particulars) and took advantage of the Hansard procedure which avoids a prosecution ensuing.

By avoiding an unpleasant confrontation we had time to convince our client that a full disclosure was needed if prosecution was to be avoided. Once we had our clients full confidence the extent of cash extractions and stock manipulations was established and our final investigation report disclosed irregularities exceeding £300K. A satisfactory cash settlement was negotiated with the Inland Revenue at which point they revealed that all along they held copies of internal memos which frankly spoke of tax avoidance -- "we need to fiddle the stock figure like we did last year" -- on which they would have prosecuted had not the initial admission been made.

Where an irregularity has occurred over long periods you can convince yourself that no one can find out about it. A client can be his own worst enemy but we like to think that our combination of tax expertise, investigating skill, negotiating abilities and finally, experience of human psychology, can give a client the confidence to face what seems to be an uncontrollable situation.

Double Double Entry Bookkeeping.

Another case of ingenious tax evasion involved a complicated procedure for hiding undisclosed profits. The client set up 2 bank accounts that he did not disclose to the Inland Revenue. Whenever a sum was paid into one of these accounts an identical sum was withdrawn from the business account and paid into the second undisclosed account. The theory was that if one account was ever discovered there would be a readily demonstrable source for the deposits. The likelihood of both accounts being discovered at the same time was considered to be remote. Looking into the future in this way is however entirely unreliable.

What the client failed to predict was his untimely death. His widow was faced with the task of repatriating the amassed funds from the final offshore repository – a bank account that was in a false name. A court order was required to vouch her entitlement to the funds and voluntary disclosure to the Revenue achieved additional penalty abatements and a legally watertight resolution of the affair.

No matter how well planned a tax evasion strategy is planned it is always a time bomb waiting to go off. There are many factors which are outside of everybody’s control. In this case, the client had also overlooked the banks money tracing records which are maintained to comply with the Money Laundering regulations – it would only have been a matter of time before his plan unravelled - had he lived to see the day.

Remember...always check the facts...

Using specialist tax advisers can save you money but you must ensure beforehand what their charges are going to be and what guarantees, if any, they are giving. After initial enquiries, you should ask for the tax advice in writing, which may be marginally more expensive but at least there should be no doubt regarding the advice given.

Be very careful of any advice which relies solely on a complicated structure which is not to be revealed to the Inland Revenue. Such advice is often dependent on the fact that the Inland Revenue do not get to understand the true nature of the transactions and this often moves the advice within the sphere of evasion rather than legitimate tax planning....