Most enquiries are targeted, following risk assessment of the tax return. When the Revenue starts an enquiry, there are usually concerns about the return submitted.

Once an enquiry is started, the aim should be to co-operate with the Revenue's reasonable enquiries. Your accountant, or specialist enquiry practitioner, can assist in advising what is reasonable and what the Revenue is entitled to.

Questions about the accuracy of your tax returns, accounts or business records should not be answered. Potential problem areas include requests for private bank account statements and information in electronic format, such as CD or floppy disk.

Each case needs to be assessed on the particular circumstances, but, in general, private bank account statements should not be provided until the inspector has demonstrated that there is a problem with the business records.

Where there is a request from the inspector for information in electronic format, this should be resisted.

The suggested route for dealing with this type of request, providing the information being requested is reasonable, is to provide the details in hard-copy format, ie, printouts of the relevant entries.

Avoid delay

Delay in dealing with the inspector's enquiries should be avoided. If replies cannot be provided within a reasonable time, then the inspector should be informed as soon as possible and an estimated timescale indicated for a reply to be provided.

The inspector should be challenged where he is, or seems to be, acting outside the Inland Revenue's Code of Practice (for most enquiries conducted at local district level this will be Code of Practice 11 (Income Tax) or Code of Practice 14 (Corporation Tax) which govern the inspector's conduct during an enquiry).

In most enquiries, the inspector will ask to see the taxpayer - this should only be done following the inspector's review of the business records.

The taxpayer is not obliged to attend any meetings with the inspector, and, usually, it will not be in his interest to do so.

The inspector may apply undue pressure on the agent and taxpayer to force the latter's attendance, including direct contact with the taxpayer, even where there is an agent acting.

If there are problems with your accounts, and you need to reach a settlement with the Inland Revenue, there may also be interest and a penalty to pay, as well as additional tax.

Independent tribunals

Most enquiries are settled by agreement between the inspector and the taxpayer. However, it is important to be aware that the inspector does not have the final say in determining the level of additional profits.

There is an independent body, the Commissioners, who resolve situations where the inspector and taxpayer cannot reach agreement. The inspector will issue determinations or assessments, depending on the circumstances, in the figures of profit he thinks are appropriate.

Appeals against the assessments or determinations are heard by the Commissioners, who are then required to make a decision based on the evidence before them.

There are two bodies of Commissioners: Special Commissioners, who are legally qualified, and General Commissioners, who do not have specialist tax knowledge and tend to be local businessmen.

Your accountant can advise on which body of Commissioners are best placed to hear a particular appeal.

The use of the Commissioners to settle an enquiry should be a last resort, as it indicates that negotiations with the inspector have broken down. It is important to remember that if you lose your case at the tribunal, you may end up paying substantially more than if you reach an agreement with the inspector.

Costs of dealing with an enquiry

Apart from the financial settlement with the Inland Revenue, the costs of dealing with an enquiry can be substantial. An enquiry can take many months to resolve, sometimes years, and consume considerable time resources in collating information and dealing with the inspector's enquiries.

Although professional costs can be substantial, proper representation is essential. It is generally unwise for taxpayers to face the Inland Revenue without the support and guidance a professional agent can provide.

The services of a specialist enquiry consultant should be sought in appropriate circumstances, particularly where the position is complex, or the inspector is seeking substantial amounts of additional tax, or it is felt that the inspector is being unreasonable. They can advise on whether the inspector's requests are reasonable, and offer guidance on minimising any additional liabilities, including the size of penalty.

Generally, the professional costs of dealing with an enquiry are not an allowable deduction.

VAT-registered persons can reclaim VAT suffered on fees that relate to the business.

Professional costs for dealing with an Inland Revenue enquiry can be significant, even if adjustments are not required to the business profits. Many businessmen will consider seeking redress for the expenditure incurred.

The situations in which the Inland Revenue will reimburse professional fees are even more restricted. The Inland Revenue has published guidance on the circumstances in which they will consider allowing a deduction for these professional costs.

The extent to which you are able to reclaim fees, or obtain a deduction, will depend on the outcome of the enquiry. Unless there are only very minor, or no, adjustments, the prospect of recognition of the professional costs incurred is remote.

For the inspector, the main concern is that all income and expenditure can be verified.

This means you need to retain vouchers for all expenses, and copy invoices for all sales income. Where invoices are not issued, then a record of takings should be maintained, ideally reconciled on a regular basis. This will make it easier to refute any allegations the inspector may make about irregularities.

Finally, it is also important to ensure that all returns are submitted within the statutory time limits. This includes not just the annual tax return, but also, for example, form P35.

Regular failure to adhere to the time limits can result in unwanted attention from the Inland Revenue.