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Summer 2004 Bulletin

SHAKING THE TREE

In recent weeks, thousands of self-employed people and small business proprietors have received a letter from the Inland Revenue saying that:

‘This letter is to remind you that your Tax Return is a legal document and that your signature is a declaration that the information in the Return is, to the best of your knowledge and belief, correct and complete.

‘From a risk review of 2003 Returns, we have identified an aspect of the Self-Employment pages of your Return which may need particular attention. We want to help you get this aspect right first time for 2004 .....’

Most people have read this letter as an accusation that there was something wrong with their Return for the year to 5 April 2003 – and many assumed that it was the opening shot in a full-scale Inland Revenue enquiry. The letters are still being sent out and so are worrying more and more people.

In fact, the Inland Revenue’s computers have been programmed to identify certain situations, such as a trader whose Return does not include an add-back for private motoring. If the red light flashes, a letter is generated automatically, even though there may be a good reason why there is no add-back – for example, that the only business vehicle is a concrete mixer lorry.

Other known ‘triggers’ are wages paid to a family member, substantial claims for travelling and subsistence, or for advertising, promotion and entertainment, and professional costs in excess of an average accountancy fee. A full list of ‘triggers’ has not of course been published, but it probably also includes an analysis of ratios, such as sales to purchases. Falling profits, or profits which fluctuate from year to year, have always struck the Revenue as suspicious, even though in the real world business proprietors rarely enjoy the steadily if gently rising income typical of a salaried career.

The letters are known, in Inland Revenue jargon, as ‘enabling letters’ because they ‘enable taxpayers to put things right’. That of course assumes there is something wrong in the first place, which will not necessarily – or even usually – be the case. The letters are being sent to a broad spectrum of self-employed people and business proprietors, on the basis of ‘Let’s shake the tree and see what falls out’ – the Revenue are simply assuming that a minority, however small, will have a guilty conscience about something and come forward with their hands up.