I have a friend/potential bookkeeping client, who after difficult circumstances and alcohol addiction, has starting to get her life together and stopped drinking etc. Over the last 10+ years she has bought properties to rent out and now has 4 properties.
She has never registered self employed or paid any tax, and has interest only mortgages on these properties except for one which I think she owns all or part of. So she has a fair amount of expenses, and says her net income could have been below the tax thresholds, (roughly £8000, now £10000 ?) but to be honest doesn't really know.
So if this is true she would have not much to worry about when going to HMRC to declare all this ?
But all she has are her bank statements, so firstly just knowing her exact expenses and income isnt going to be possible so how does she or HMRC calculate how much tax is due? and what are the procedures to go through in this case?
Does she have to pay an accountant to go through 10 years of bank statements?
How do HMRC help people handle this process when they contact them?
Thanks
edit: also if they do have to pay overdue taxes, what are the fines likely to be like, and how will HMRC want them to pay this, would they force them to sell/remortgage their house that they do own, or can they setup up monthly repayments etc ?
-- Edited by Soar on Thursday 6th of June 2013 08:28:01 PM
I am surprised she has gotten away with this, as Land Registry pass every transaction to HMRC for review.
The chances are that £100 penalty will be levied for every 6 months that each tax return was overdue. For the older returns, I expect HMRC would honour the old rule - no liability = penalty gets waived, but I cant be certain. If a liability arises, she could face late fee plus interest. The new rules introduced recently state that whether there is a liability or not, £100 will be charged for a later return. Heres a useful link
Some consideration may be given by HMRC due to the circumstances, a good accountant should be able to argue that case for you. Its worth trying to find one with long experience of investigations.
She can cut her accountancy costs by preparing spreadsheets for each tax year, to analyse rents received, and expenses paid out. If there is a business bank account, rather than a personal account, she would need to include every transaction on the spreadsheet. I would suggest she gets on with straight away so she can assess her position before making the phonecall.
I've never had to argue one ten years back but hope Soar is able to tell us the upshot of it all.
I just wonder if the Revenue will argue that as she was able to acquire successive properties and run a rental busines - then she couldn't have been all that unwell. Indeed, if she was making a profit they could argue the taxpayer was helping her build her portfolio.
There will be a fair bit of estimating for unrecorded transactions and that will just be a case of bartering with the Revenue until agreement is reached. Sometimes the only evidence of an expense will be memory: that and the probability that the fixture or expense was paid when stated.
On the other hand, she is coming clean instead of being caught so the penalties won't be quite as bad.
Thanks for replies. So far she is quite happy to go through her bank statements and I can show her how to categorise transactions. And she is waiting for some accountants to get back to her. So we will see..
PS. Is there anything like a cut off point of 10 years so anything that should have been declared more than 10 years ago cannot be examined or taxed etc.. ? Only ask because I think she was renting out just one room maybe more than 10 years ago but it wouldnt of been enough to change the tax she paid, just when she talks to hmrc are they going to want details of income/expense this far back..
-- Edited by Soar on Saturday 8th of June 2013 11:10:27 AM
She had other difficult circumstances as well, such as looking after her sister who was mentally ill, and maybe more I'm not sure, but really I would just hope that her income was low enough and maybe a little over the tax threshold here and there, and mainly because she is coming forward unprompted that they will impose the minimum interest and fines.
Also good to know they are ok with setting up payment plans and wont force her to sell her house or anything if they can agree on terms.
Thanks again.
-- Edited by Soar on Sunday 9th of June 2013 02:31:45 AM
For self assessment of an employed individual HMRC would seldom go back more than 12 months.
The bulk of our clients need to keep records for five years +1 (five plus current)
HOWEVER... (big however).
Whilst HMRC will only generally go back 5 years, if they find any instance of fraud rather than a simple mistake then they could if they so wished go right back to the inception of the business.
So, from our perspective assume that a client who we thought we had been keeping on the straight and narrow managed to commit a fraud how many peoples records would go back in sufficient detail to be able to give a conclusive, evidenced answer on a situation that may have occured 15 years previously?
Of course from HMRC's perspective the investigation has to be worth their time and effort and whilst some of our clients may have a bit of money going back 15 + years is only going to be cost effective for the big boys where HMRC are harvesting substantial returns on their time and effort (sometimes I think that HMRC think more in business terms that some of my clients! I should get them to come along to a client meeting and explain the concept of cost to return as it's definitely lost on some of mine).
As such, I think that six years is a reasonable retention period although I have read that some practices have started adopting 15 years as standard which I suppose is down to much cheaper storage costs by just scanning everything.
For your client, if HMRC pursue that one and actual figures are not available then they may estimate the tax liability based on more recent figures.
When they have prepared their case it will be very much down to you trying to negotiate a full and final settlement and payment schedule (make sure that the version that you get in writing says exactly what you agree). They won't budge on the base amount but they have considerable flexibility around the interest, penalties and surcharges that they will be applying (which are likely to come in at much more than the actual outstanding tax liability.
As Tim indicates above, if she was sober enough to run a business then she was sober enough to know what she was doing and HMRC will not consider her drinking any excuse for her tax problems,
Hope that helps,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
