A tale of taxing terror

HER MAJESTY'S Revenue and Customs say "Tax Needn't be Taxing". I believed them and I was wrong.

I am a cautionary tale. Like most people reading this I'm a freelance journalist and I filled out an annual tax return. It was a complicated form but my income was small and simple so I gave it a go (rather than shell out £300 plus for an accountant). When an investigation was launched just under five years ago it all went horribly wrong.

No detail was too small to question. A £10 David Beckham book became of great interest: "Are there any documents to show that you purchased the book in the belief that you would get to interview him... that shows that it was not purchased for your enjoyment?"

Beckhamgate went on over nine months, two interviews and many letters; it was the beginning of a Kafkaesque nightmare. I was presented with a blur of figures on stacks of headed paper. Further years were opened for investigation; more documents were requested; statements were examined with forensic intensity. There was talk of negligence and of large amounts to pay with penalties and interest too.

In January 2007 I used the 1998 Data Protection Act to get copies of my HMRC file - which anybody can do. The true picture of the investigation emerged. The inspector - so bullish on the phone and in meetings - admitted in an email: "I haven't insulted him, mostly I was... trying to make him go away." And in another she confessed: "I'm feeling a bit lost... [it's] not a large settlement." Here are five things you need to know about tax investigations and HMRC would rather keep quiet.

Tax is not simple Advertising front man Adam Hart-Davis, who had been delivering the "Tax doesn't have to be taxing" line for five years, walked out in January last year saying that VAT in particular was "absurdly complicated".

You get the allowances you negotiate An inspector opening a case simply looks at a list of expenses and says, "That's not allowable, that needs to be reduced to 80 per cent... do you get personal enjoyment from this? We will have to reduce that..." When your expenses are eroded your profits shoot up - et voilá - the taxman gets a result.

I put in expenses of just under £4000. Every item was questioned, from newspapers and magazines to office rent. After a year I was told I'd be allowed just £1000 of that figure. I dug my heels in and stuck to my guns; the figure went up to £2500 and then to £3000.

You are guilty unless you can prove otherwise Under criminal law you are innocent until proven guilty. The tax system turns this on its head: the burden is on you to prove your innocence. Say your grandmother gave you a cheque for £100 for your birthday four years ago. HMRC will seek out your personal statements and question where that amount came from: if you can't provide proof they will most likely assume that the money is undeclared income and you will be taxed on it.

The interview is a trap In a criminal investigation you are cautioned that what you say may be used against you - no such niceties are offered by HMRC. You can be represented - which HMRC is vocal about - but then there are other rights they prefer to keep quieter.

You can have the interview at the location of your choice (go for neutral ground), you can ask for a detailed agenda of the meeting beforehand and you can also record the interview (an invaluable tool). You can also refuse to attend an interview. HMRC may argue that this is being uncooperative (making you vulnerable to heavy penalties) but provided you answer all questions in writing you can argue that you have cooperated.

They bully HMRC know that representation is expensive so they drag the investigation out before presenting a settlement offer. This offer may be unfair, but the option is to go on paying high fees for months, possibly years. Most are pragmatic and will do anything to end the investigation.

  • Nick Morgan's ebook, Tax Investigation for Dummies: Everything you wanted to know about a tax investigation but were too afraid (or skint) to ask is available at www.tax-hell.co.uk

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