INVESTIGATIONS - 22.05.2008

A professional opinion of your bookkeeping

What’s the Taxman after?

News. If the Taxman can establish that your accounting records are not robust, his internal guidance instructs him to request private records and so dig into the private side of your business life. The latest hawkish tactic from inspectors is to imply that your accounts (prepared from the business) records are flawed because your advisor will not have 100% vouched or verified them, thus allowing him to go straight into your private records. And all of this in his initial opening letter before he’s even examined your business records.

For example. In a recent opening letter an Inspector said: “The accounts are not based on a robust and effectively operated record keeping system as they include unvouched or unverified sums other than of a minor nature. Therefore, please supply statements in respect of any other bank/building society accounts held.” The inspector is effectively questioning your advisor’s professional opinion on your bookkeeping. He is implying that less than 100% vouching entitles him sight of private bank statements. Is he right?

Something to worry about

The Taxman is entitled to demand access to such documents as he may “reasonably require” for the purpose of determining whether your tax return is incorrect. So the question is, at what point is it reasonable to require access to private documents?

Ultimately, it’s a question of judgement and of what a tribunal (currently the Commissioners) would wear; that is explicitly recognised in his Enquiry Manual paragraph EM2221.

It is for the Taxman to make a case that it’s reasonable to suppose that the private records may be relevant. In a non-cash business where all the recorded sales are against invoices and paid by cheque, the threshold for demonstrating that private records may be relevant will be quite high. But, whatever the nature of your business, the Taxman can’t come to the conclusion that private-side records are likely to be relevant without first examining your business records.

How should you respond?

You and your advisor’s initial reaction should be to tell the inspector to “go and boil their head”. However, that course of action would be completely counter-productive for all concerned. Obviously, you need to respond to the inspector’s tactics with a carefully considered tactical reply.

Tip 1. 100% vouched expenditure is unrealistic, even for a listed company. As the Taxman isn’t allowed to form an opinion without first inspecting your business records, resist any comment on the state of the records in your reply.

Tip 2. Suitable words for your reply to the inspector’s initial enquiry letter on this point would be along the lines of: “We are, of course, happy to provide the private-side documents if and when you can make a case that they are reasonably likely to be relevant. We suggest that this point be revisited after you have made your examination of the business records and in light of anything you find there.”

Tip 3. However, if the accounting records are shown to be unreliable, the private records will be needed. So together with your advisor, check that the private statements in question do not, for example, contain any undisclosed income.