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bigduckontax, Accountant
Category: Tax
Satisfied Customers: 4786
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I am self employed and have been under investigation. hmrc

Customer Question

I am self employed and have been under investigation. hmrc have decided I deliberately made false tax returns. They came to this conclusion because cash was paid into the bank but not declared as cash payments, this was because the cheques had been cashed by friends and family. All tax was paid on these cheques by the contractor and this has been verified by them but because I will not ask the person who cashed them for their bank records (they have recently been diagnosed with cancer and are undergoing treatment), they are now saying tax needs to be paid on this amount too and the records were falsified.
I don't understand why it makes a difference where the cheques were cashed as the amount was declared and tax already paid. Please help me understand where he is coming from?
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I am Keith, one of the experts on Just Answer, and happy to help you with your question.
HMRC are very good at making assumptions, invariable incorrect and always in favour of the Revenue.
You must write to the tax office concerned refuting that you falsified any tax returns in any way. These cheques were in any event net of tax and in respect of a third party they are not taxable emoluments in your tax affairs. You should explain that cashed these cheques for a friend who was undergoing cancer treatment at the time.
Many years ago I had a similar altercation with the then HM Customs and Excise over a VAT inspection. The company whose accounts I ran, acted as a banker for two other companies. Although I briefed the Inspector he still went on willy nilly adding up all payments in to the account, in his words, to work out the VAT due. The company received a bill for about 2.5K of allegedly unpaid tax, but one letter to the local office had that cancelled.
I do hope that my reply has shown you a way forward in this matter.
Customer: replied 2 years ago.
I think you misunderstood my question. We didn't cash the cheques. A friend put the cheques into their account as we needed disposable cash quickly and didn't have the time to wait for them to clear in our account. The cheques came from contractors and the tax was deducted at source. My question is what difference does it make to hmrc if the cheques received were declared as earnings and the tax was deducted whose bank account it went into? Hmrc are saying that any cash paid into our account is undeclared earnings.
Customer: replied 2 years ago.
Hmrc has proof from the contractors that the cheques were paid and tax paid as he wrote to all of them too.
Customer: replied 2 years ago.
Forgot to mention this has been going on for three years!! We are at a loss as of what to do now.
Expert:  bigduckontax replied 2 years ago.
From what you say these are not earnings, but loans to the company. Loans are outside the scope of UK taxation until such time as interest is paid or received. Then that element and that element only becomes an income or an expense.
HMRC should be advised to that effect and any attempt by HMRC to classify it as income resisted.
HMRC's suggestion that any cheques paid into the company are earnings is sheer twaddle.
Customer: replied 2 years ago.
These were not loans. It was a way of getting the cash for the cheque quicker than putting it into our account and was tax deductable because it was money earned.
Customer: replied 2 years ago.
I am a sole trader not a huge company.
Expert:  bigduckontax replied 2 years ago.
If it is money earned then its inclusion as earnings appears entirely proper.
However, I cannot see how getting cash into the company deoa not constitute a loan. Were it classified as earnings, which it would appear not to be, then it would be taxable, but for what service?
Customer: replied 2 years ago.
NOT a loan. Just like a cheque a change. Cash received for cheque handed over to third party and deposited into bank account (cash)
Expert:  bigduckontax replied 2 years ago.
So, it is outside the scope of UK taxation altogether unless, of course, there is a 'turn' on the cash against the cheque which appears unlilkely from the tenor of your question..
Customer: replied 2 years ago.
I assume by 'turn' you mean turned the cheque into cash. Yes
Expert:  bigduckontax replied 2 years ago.
No, by 'turn' I mean a difference between the cash and the cheque value; a by no means unusual occurrence on such transactions.
Customer: replied 2 years ago.
Simply put...turned the cheque into cash (cheque already having tax deducted) paid some of cash into bank. Tax man wants to tax cash again.
Expert:  bigduckontax replied 2 years ago.
Well he can't, the whole idea is ludicrous and he should be told so. His ideas are quite simply balderdash and piffle.
Customer: replied 2 years ago.
Thank you...exactly what we thought but how do we tell him that when he's asking for third parties bank statements and as I said earlier they are receiving treatment for cancer and do not want to burden them with our tax troubles.
We have done this many times with cheques and only a small amount of cheques were paid into the bank. The others were mostly cashed by a third party (which again already had tax deducted) and some of the cash for them paid into the bank.
Believe me we are pulling our hair out trying to explain this to the man who obviously has no idea what he's doing!
Expert:  bigduckontax replied 2 years ago.
just keep plugging away at this ignorant official. Eventually your letters will rise through the hierarchy within the tax office until they reach the desk of an official with a more comprehensive knowledge of taxation than is currently being displayed. He is asking for third party bank statements, so tell him to apply to that third party who will doubtless tell him to take a running jump, perhaps somewhat more politely. Note my comment in my initial reply regarding a complete idiot of a VAT Inspector who simply could not understand how the business operated, despite it being clearly explained.
When you, as I have, heard an Inspector of Taxes demand immediate settlement in cash of taxes which were not even due nothing will surprise you. That Inspector did not get the money needless to say, simply reported to his superiors who quickly withdrew the demands.
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