As a professional dealing with HMRC on a daily basis, many do a good job on a daily basis. However, when it comes to Tax Investigations into Accounts the same old issues come up time and time again. The main bugbears are:-
Stock and Work in Progress. Invariably HMRC try to change a basis of a valuation particularly where a professional independent valuation has not been obtained on the grounds of cost. It they successfully change the basis, then the opening and closing valuations are uplifted. The result is very actual little increase in profits.
Debtors. These are receipts that have not been received at the year end but the work done was in the year. Technically HMRC are correct under accounting principles. If the work was done in the year then it should be recognised in the Accounts for that year. However many businesses that are under Cash Accounting for VAT only record income when received not when the work was done.
Private Use. Where a proprietor of a small business works from home it is inevitable that there will be mixed use of domestic services. Many an hour has been spent arguing about proportions.
In the case of the first two the issue is one of timing. Over the lifetime of a business all the income of that business is recorded and taxed. The simplification of Cash Accounting has not been extended to Direct Taxation. The third is one of cost effectiveness. Is it really worthwhile arguing? Why should Joe Public have to concede that it is not. I would introduce the following Investigation standards.
Where a business is either very small or is under Cash Accouting I would exclude Stock, Work in Progress, Debtors and Creditors from any HMRC Investigation. The main check should be that income is being declared.
For Private Use I would introduce de minimus limits whereby HMRC will not even bother looking at expenses based on turnover of the business and average bill levels and for payments over that level accept a split that the Taxpayer and his Accountant can demonstrate is a just and reasonable split between business and private use.
Why is this idea important?
HMRC Investigators do not have to quantify their time or justify their costs. I have experienced many cases where very little tax is gained in relation to the reams of correspondence and time involved. They try to apply the textbook to the real World and don't seem to consider their own costs. I would ensure that where targets of tax yield are set, that there is a threshold set for acheiving that yield. A HMRC Investigator who writes 20 letters over two years and gains £3,000 in tax is probably losing money for the purse once the costs are taken into Account.
My suggestions would free up HMRC Investigation time that seems to be attacking small businesses that are doing the best that they can, given that they did not train to be Book keepers or Accountants and cannot afford an Accountant to look at every single invoice and receipt.
The suggestions will ensure that HMRC resources are simply not wasted on correcting technical wrongs that in the lifetime of a business has little effect on the overall tax paid by that business.