HMRC Discovery Letter
Discussion
Hi,
I just received a letter from HMRC claiming that they think there has been an amount of tax that is due that was not included on a tax return relating to 2002. They claim this tax is to do with income from property, but at that time there was no income from property, so I'm not sure where they get their information from.
The letter cites section 29 of the Tax Management Act 1970, which I understand means they can investigate a tax period if they think there has been either fraud or negligence. This I presume they are using as they are outside the normal period for which they can initiate a standard enquiry.
Now, like I said earlier, I really do not know where they are getting this idea from, but what is the best way to reply to this letter? Having read a little about it, as I understand it, HMRC do not have any powers to investigate under s29, unless it is granted by the Special Commissioner.
According to some of the information I've read, HMRC use this as a fishing exercise, whereby depending on your reply, they look for an excuse to start a discovery. Now, I don't really mind a discovery, but I'd rather avoid it as it would inevitably mean time and effort (read money) wasted on a pointless exercise, so I'd definitely rather avoid it if I can. But, I don't want HMRC thinking I'm a smart arse either and that I've got something to hide, when I don't!
Do I reply with something to the effect: "I know you can't really investigate this under s29, but just so you know there is nothing owed, the details on the return would be the same today as it was when made several years ago. Fortunately you are wrong, no additional tax is due. I do not agree that a discovery is required and valid, please now go away."? There's no additional information to provide so I can't see how else to help them with their inquiries, and consequently feel that there is no way to avoid a "discovery"?
As a matter of interest, are the assumptions I made above about section 29 and HMRC powers correct anyway? In general, i.e. not in reference to my case, what information would they need to have to be able to convince the Special Commissioner that they believe a "discovery" should be made? It seems a bit of a chicken and egg problem, how do they know a negligence or fraud has occurred if they are seeking further information? Seems odd to me.
I just received a letter from HMRC claiming that they think there has been an amount of tax that is due that was not included on a tax return relating to 2002. They claim this tax is to do with income from property, but at that time there was no income from property, so I'm not sure where they get their information from.
The letter cites section 29 of the Tax Management Act 1970, which I understand means they can investigate a tax period if they think there has been either fraud or negligence. This I presume they are using as they are outside the normal period for which they can initiate a standard enquiry.
Now, like I said earlier, I really do not know where they are getting this idea from, but what is the best way to reply to this letter? Having read a little about it, as I understand it, HMRC do not have any powers to investigate under s29, unless it is granted by the Special Commissioner.
According to some of the information I've read, HMRC use this as a fishing exercise, whereby depending on your reply, they look for an excuse to start a discovery. Now, I don't really mind a discovery, but I'd rather avoid it as it would inevitably mean time and effort (read money) wasted on a pointless exercise, so I'd definitely rather avoid it if I can. But, I don't want HMRC thinking I'm a smart arse either and that I've got something to hide, when I don't!
Do I reply with something to the effect: "I know you can't really investigate this under s29, but just so you know there is nothing owed, the details on the return would be the same today as it was when made several years ago. Fortunately you are wrong, no additional tax is due. I do not agree that a discovery is required and valid, please now go away."? There's no additional information to provide so I can't see how else to help them with their inquiries, and consequently feel that there is no way to avoid a "discovery"?
As a matter of interest, are the assumptions I made above about section 29 and HMRC powers correct anyway? In general, i.e. not in reference to my case, what information would they need to have to be able to convince the Special Commissioner that they believe a "discovery" should be made? It seems a bit of a chicken and egg problem, how do they know a negligence or fraud has occurred if they are seeking further information? Seems odd to me.
Eric Mc said:
Did you have a property during the period in question?
If you did, why would they think that there was rental income?
If there was no rental income, can you show that this was the case?
Do you have an accountant?
Hi,If you did, why would they think that there was rental income?
If there was no rental income, can you show that this was the case?
Do you have an accountant?
Thanks for your reply. In answer to the questions,
1 At the time I had only my primary residence, nothing else. I don't know how or why they came to the conclusion that I had rental property.
2 I did not have any rental income, but I don't know beyond bank statements what would suffice? Would providing bank statements give grounds to trigger a "discovery" as "new" information is now being presented to them (even though you're never asked to provide bank statements anyway). Or would it be the opposite, providing that information would mean they cannot request a "discovery"?
3 Currently I don't have an accountant, as most of my income is PAYE with additional dividends etc so nothing really complicated. Would it be beneficial to employ an accountant with regards to this matter, or am I overestimating the issue? I'm feeling a little paranoid, even though I know I've done nothing wrong?
Thanks again
If you didn't have a rental or second property during the time period they are seeking information for, why do you think they think you have not declared rental income?
Did you have lodgers in your home?
If they have got their wires crossed, I would simply write back to them telling them that during the period they are questionning you did not have any rental income because you had no property that could have been used to generate rental income. If they think otherwise, I would ask them to reveal to you the information on which they are basing their allegation.
At this stage it might not be necessary to engage the service of an accountant, but if they do not back off following your inital reply, you might have to hire one.
Did you have lodgers in your home?
If they have got their wires crossed, I would simply write back to them telling them that during the period they are questionning you did not have any rental income because you had no property that could have been used to generate rental income. If they think otherwise, I would ask them to reveal to you the information on which they are basing their allegation.
At this stage it might not be necessary to engage the service of an accountant, but if they do not back off following your inital reply, you might have to hire one.
Eric Mc said:
If you didn't have a rental or second property during the time period they are seeking information for, why do you think they think you have not declared rental income?
Did you have lodgers in your home?
If they have got their wires crossed, I would simply write back to them telling them that during the period they are questionning you did not have any rental income because you had no property that could have been used to generate rental income. If they think otherwise, I would ask them to reveal to you the information on which they are basing their allegation.
At this stage it might not be necessary to engage the service of an accountant, but if they do not back off following your inital reply, you might have to hire one.
Thanks for the reply. I do think they have got their wires crossed. I didn't have a lodger either. In the letter they ask for the details of the property that "may" have generated this "income". The letter goes on to say that they will give me a number of weeks to make any amendments to my 2002 tax return to include the "income" and pay the tax due (with interest). I thought, oh HMRC can be nice, and then I remembered there wasn't any tax due!!!Did you have lodgers in your home?
If they have got their wires crossed, I would simply write back to them telling them that during the period they are questionning you did not have any rental income because you had no property that could have been used to generate rental income. If they think otherwise, I would ask them to reveal to you the information on which they are basing their allegation.
At this stage it might not be necessary to engage the service of an accountant, but if they do not back off following your inital reply, you might have to hire one.
I'll follow your advice and send them a letter to that effect. Do they have to give me a reply, or can they just proceed to seek a "discovery" without further reference to me? Bit concerned to get an accountant if I need one earlier rather than later, if it's a necessity.
Soovy, lol! I think they've got their wires crossed somewhere, but like I said before, I just can't see where.
Anything to make them think your primary residence wasn't where you were living?
Council tax registered somewhere else?
Employer PAYE records out of date with an old address?
Good chance if you moved around the time of this claim and other details are out of sync then they'll assume that your primary residence was investment/rental.
On the other hand, if this isn't the case then provide them with evidence showing that it was your primary residence. Easier proving them wrong than getting in an argument or inciting an investigation imo.
Think about what public databases you're on, and if there have been any changes actioned or not actioned that might give rise to suspicion.
Council tax registered somewhere else?
Employer PAYE records out of date with an old address?
Good chance if you moved around the time of this claim and other details are out of sync then they'll assume that your primary residence was investment/rental.
On the other hand, if this isn't the case then provide them with evidence showing that it was your primary residence. Easier proving them wrong than getting in an argument or inciting an investigation imo.
Think about what public databases you're on, and if there have been any changes actioned or not actioned that might give rise to suspicion.
I had a similar thing a few years ago. They did me a similar letter - but about earned income not declared rather then rent. I rang them up and talked to them (probably a bad move) but got them to tell me that they though tmy earnings had been more than double what was declared. Turned out that the company I worked for had submitted two lots of tax returns - one from the actual co that paid me and another for the parent company (different addresses - names not related), complicated by them also declaring a large expense (server bought on my credit card) as salary as well.
On the other hand I knew a guy that bought 20 houses and didnt declare the rental income from any of them. They caught him when they computerised the land registry stuff.
On the other hand I knew a guy that bought 20 houses and didnt declare the rental income from any of them. They caught him when they computerised the land registry stuff.
Eric Mc said:
The Revenue can sometimes add two and two and get five. They do sometimes jump to the wrong conclusions.
Unfortunately, unlike general law, it is up to the taxpayer to prove that the Revenue's assertions are wrong.
Thank you all for all your comments and help. It appears it could be that I'm still registered as living at my parents house (even though I moved out in 2001!) as I think they have not updated their election list that comes through the door (silly sods).Unfortunately, unlike general law, it is up to the taxpayer to prove that the Revenue's assertions are wrong.
Pretty innocuous in the end. It just shows how heavy handed Revenue regulations can be. They have a small problem but rather than send out a simple query letter explaining their problem and asking for clarification, they send out a letter threatening all sorts of dire consequences etc etc. This is a serious problem as a result of the way tax regulations changed under the switchover to Self Assessment in the mid 1990s.
Edited by Eric Mc on Monday 16th February 16:48
Eric Mc said:
Pretty innocuous in the end. It just shows how heavy handed Revenue regulations can be. They have a small problem but rather than send out a simple query letter explaining their problem and asking for clarification, they send out a letter threatening all sorts of dire consequences etc etc. This is a serious problem as a result of the way tax regulations changed under the switchover to Self Assessment in the mid 1990s.
The problems came about when the Revenue joined with Customs.Edited by Eric Mc on Monday 16th February 16:48
No. it predates that by quite a while.
As part of the introduction of the Self Assessment regulations in 1993/94/95, the Revenue lost the ability to raise simple query letters which they had traditionally used to clarify aspects of a taxpayer's affairs. I know, as I dealt with many of these letters over the years. These query letters usually related to single point queries - like a question about a particular heading in a sole-trader's set of accounts, or a query on a pension contribution increase during the year, or maybe the omission of interest received from a tax return. If the inital queries could not be answered for whatever reason (or the Revenue were not satisfied with the replies they had received), they would then launch a full blown Tax Investigation or, in serious cases, a Tax Enquiry (which was much deeper).
With Self Assessment, the simple query letter was abolished and so was the follow on old style investigation. In its place was a new style tax return enquiry which was much more akin to the pre SA era "Tax Enquiry".
Because of the seriousness of an "Enquiry", they felt that they had to send a detailed letter to the taxpayer explaining what section of law was being used to instigate the enquiry and outline the taxpayer's rights under that law. It wasn't far off what a policeman does when you are arrested - and it was a far cry from a simple question such as "Can you explain why the Drawings levels in the accounts have reduced?".
It seems that the OP had one of these "letters" whgen all they wanted to do was check up on hois address.
The merger with HMC&E was only a few years ago. These letters have been issued since 1997.
As part of the introduction of the Self Assessment regulations in 1993/94/95, the Revenue lost the ability to raise simple query letters which they had traditionally used to clarify aspects of a taxpayer's affairs. I know, as I dealt with many of these letters over the years. These query letters usually related to single point queries - like a question about a particular heading in a sole-trader's set of accounts, or a query on a pension contribution increase during the year, or maybe the omission of interest received from a tax return. If the inital queries could not be answered for whatever reason (or the Revenue were not satisfied with the replies they had received), they would then launch a full blown Tax Investigation or, in serious cases, a Tax Enquiry (which was much deeper).
With Self Assessment, the simple query letter was abolished and so was the follow on old style investigation. In its place was a new style tax return enquiry which was much more akin to the pre SA era "Tax Enquiry".
Because of the seriousness of an "Enquiry", they felt that they had to send a detailed letter to the taxpayer explaining what section of law was being used to instigate the enquiry and outline the taxpayer's rights under that law. It wasn't far off what a policeman does when you are arrested - and it was a far cry from a simple question such as "Can you explain why the Drawings levels in the accounts have reduced?".
It seems that the OP had one of these "letters" whgen all they wanted to do was check up on hois address.
The merger with HMC&E was only a few years ago. These letters have been issued since 1997.
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