HMRC has introduced a new approach to handling repayment queries.
The beginning of the calendar year has seen a flurry of enquiry letters issued by the HMRC Repayment Credibility Team. Typically the taxpayers receiving the letters have multiple streams of PAYE and self employment income, with losses from the self employment set against the PAYE income, giving rise to a repayment of some or all of the tax paid at source.
The letters are all generic in style with an extract repeated below:
What you need to do know Total Losses Please send us a full breakdown of the ‘Total Losses’ claimed on your Self Assessment tax return for the tax year ended 5 April 2015. This should include a breakdown of the expenditure claimed that generated the loss. We also need evidence of the payments to verify the claim made. This could be receipts, invoices or bank statements.
Please also confirm that throughout the trading period, the business has operated on a commercial basis with a view to making a profit.
If, during our check, you want to amend your tax return, please send us the details rather than making the amendment online. This is because if you were to make an amendment online during our check, we may then open another check into this amendment. If you do send us amended details to your tax return, we will make any changes to your Self Assessment when we close our check.
There is nothing new about this type of enquiry, indeed they have been common over the last few years, but what is different is that a central team is now dealing with the cases. Will this lead to a more consistent approach with one team dealing with these enquiries, or will it lead to a more critical strategy with a higher benchmark set for determining what is a commercially driven business?
As a general rule of thumb, taxpayers who are able to produce robust business and marketing plans, cashflow forecasts and other supporting research, to demonstrate there is a reasonable expectation of a profit at some point, are more likely to successfully defend any such enquiry.
Internal HMRC guidance to inspectors can be found in the Business Income Manual at BIM85705 and there is bank of case law which can also play a part in building a winning argument to put before HMRC.
Guy Smith – tax investigations manager at Abbey Tax
Abbey Tax is the UK's leading provider of fee protection and tax and funding consultancy services to accountancy firms. The business trades under two brands: Abbey Tax Insurance Services and Abbey+. Collectively the two brands work with over 2,000 accountancy practices throughout the UK.