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An interesting case of poor record keeping
Denise Perry (P) was in business as a quantity surveyor, dutifully reporting her income and expenses on her self-assessment tax return each year. However, HMRC was suspicious of the amount of expenses P claimed and in April 2013 it started an enquiry into her 2011/12 tax return and asked P for the records to back up her claims.
Her response was to phone HMRC and say that because her business had ceased in 2012 she no longer had any records. P ought to have known that the law requires you to keep records for at least the current and the previous four tax years. It would have been more sensible to have called HMRC and said that it would take her a while to provide the information. She could then have reconstructed or created records from the information available to her.
In this kind of situation, HMRC is bound to issue a formal notice (schedule 36 Finance Act 2008) asking for “information” or a “document” that will allow it to check the tax return. In the absence of proper records it wanted receipts, bank statements, etc..
P should have taken this as a hint that HMRC wasn’t going to let the matter drop and again could have asked for time to construct the records. Instead, she sent a spreadsheet that did little more that string together a batch of figures to match those in her tax return. The amounts were all round sums from which HMRC concluded that they were estimates.
The inevitable First-tier Tribunal (FTT) came down firmly on the side of HMRC. It confirmed HMRC’s much lower estimates of P’s expenses and agreed that they could be applied retrospectively for four previous years. P didn’t really give the FTT a choice. She had more than one opportunity to create the records she hadn’t bothered with while she was in business.
The First-tier Tribunal ruled in favour of HMRC as the taxpayer couldn’t or wouldn’t provide records to back up her tax return. The onus is on you to prove your figures are right.
A key factor in winning a dispute with HMRC is to produce proper records, even if you have to create or recreate them retrospectively. We hope that this problem will decrease with the advent of digital recording over the next few years.
If you are in any doubt about your position in relation to this issue, please talk to your usual Thomas Croft contact as soon as possible.