HMRC changes for farming businesses

There have been changes that have taken place in dealing with HMRC – both the way in which farming businesses submit information to the tax authorities and how those returns are checked and enquired into.

The changes that have taken place over my working career are no different to those that have transformed our everyday life – caused by the internet and information technology – and resulting in most transactions taking place online and without any human interaction.

Thinking back to when I was a young accountant – which I have to admit was long before the internet was invented – things were much different. If problems arose with your accounts or VAT affairs, it would be dealt with by a local tax or VAT office. This was generally beneficial as it is always easier to sort out a problem with someone who you had dealt with on other cases, rather than a voice on the phone at the other end of the country. However, those tax or VAT inspectors all lived locally and therefore had local knowledge which they could apply when dealing with issues.

In recent years almost all local tax offices have closed and it is unlikely that the tax inspector dealing with an accounts query is based locally or has any prior knowledge of your business. At the same time, tax inspectors have become more specialised, meaning they deal with a particular sector or technical area on taxpayers across the country, rather than all types of business within a local area.

The result of this is that we get more enquiries from HMRC than in the past and they are more varied. Rather than looking in detail at a set of accounts, most enquiries now concentrate on specific aspects. Some of these can be dealt with relatively quickly but others can develop into detailed technical arguments which can be both lengthy and expensive to resolve.

Many of these enquiries are launched with the assistance of IT software which identifies unusual entries on tax returns and figures which are higher or lower than in previous returns. Examples of these include:

  • A large fluctuation in repair expenditure between two years. This will include checks on whether building repairs include an element of improvement or relate to a farmhouse for example.
  • Large claims for capital allowances on equipment purchased. This will involve checking the date of the expenditure and in some cases whether the asset was in use before the year end.
  • Stock valuations. In particular to make sure that home bred and purchased animals have been correctly categorised and valued.

One crucial development in recent years is that HMRC can gather information from numerous sources to assist in identifying errors or undeclared sources of income. A key part of this is their computer system known as Connect which ties up information from a number of different sources such as the Land Registry, Companies House, Department of Work and Pension, Passport Office, Banks (both on and Offshore) together with online trading platforms such as EBay and Gumtree, to name just some of the sources.  It then seeks to risk score the individual’s tax return by looking for instances where the information held on its system is not consistent with the tax return.  This can then lead to an enquiry into the tax return to resolve the difference.

The introduction of Making Tax Digital and the requirement for most businesses to keep digital records is another source of information which HMRC will in future be able to interrogate to identify further reasons to enquire into a person’s tax affairs.

HMRC has long exchanged information with overseas tax authorities to help identify anyone with overseas property or investments, and again this is much easier with sophisticated computer databases. A number of clients recently received letters from HMRC asking them to consider if they needed to disclose overseas income. This was prompted by data exchanged with other tax authorities, of UK residents owning property in other European countries. In all cases these were holiday homes and there was no undeclared income but it illustrates the ease in which HMRC can obtain such information.

As a result of the prevalence of tax enquiries, it is worth considering taking out fee protection cover which will pay for the professional fees if you are unfortunate to be subject to a tax enquiry.

Before finishing this article, it is worth saying that it is not only HMRC that uses technology – fraudsters also use the internet and emails to obtain either money or personal details – so here are a few words of warning:

  • HMRC rarely contact taxpayers by email.
  • HMRC will only ring and ask you for money if you have ignored numerous letters and demands by post already.
  • Never disclose personal information or bank details to anyone over the phone.
  • The fraudsters are very convincing but do not be pressured into making a payment without checking with your accountant first.

If you need any advice about your tax matters, please get in touch with me

Contact Keith

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