Scared of HMRC? Why Tax Deserves Respect Not Fear

6 minutes ago

7 min read

There are certain combinations of letters that can make a business owner's stomach drop. HMRC is definitely one of them. An unexpected letter arrives, there's a notification in your tax account, your bookkeeper says, “Can we just have a chat about your tax?” Suddenly your brain has skipped over every reasonable explanation and arrived somewhere around “I'm going to prison.”

Tax can create a surprising amount of fear. Fear of getting something wrong. Fear of a huge bill. Fear of an investigation. Fear of not understanding the rules. Fear caused by a previous experience or simply by hearing somebody else's HMRC horror story.

I'll admit something. I too have been guilty of avoiding something because I didn't really want to know the answer.

While HMRC and your tax obligations absolutely deserve a healthy level of respect, tax isn't something to be frightened of. In fact, fear can sometimes cause far bigger problems than the thing we were frightened of in the first place.

Tax is scariest when you don't know

Imagine I tell you, your tax bill is £8,000. It's due in four months and you've already saved £6,500 towards it.

You might not be delighted. You probably aren't cracking open the champagne but you have information.

You know what you owe.
You know when it's due.
You know what you've already saved.
You know what you need to put aside over the next four months.

Now compare that with:

“I think I've got a big tax bill coming, but I haven't done my bookkeeping and I don't know how much it's going to be.” That's frightening because £8,000 quickly becomes £10,000 in your imagination. Then £15,000. At 2am, your imaginary tax bill has bought a small yacht.

Knowledge takes away much of that fear and that's one of the biggest reasons we encourage businesses to keep their bookkeeping up to date.

The Brown Envelope of Doom

Or email. Or HMRC notification.

Whatever form it takes, unexpected contact from HMRC can create instant panic. Receiving a letter from HMRC doesn't automatically mean you've done something wrong.

What should you do?... Open it.

That sounds obvious, but fear makes people avoid things. I've seen it happen, and as I've already admitted, I'm not pretending I've never experienced that instinct myself.

Read what it actually says.
Check which tax it relates to.
Check the period it's referring to.
Look for a deadline.
Decide whether you understand what's being requested.
If you don't, ask for help.

Respect it enough to deal with it. Just don't be frightened of it before you even know what it says.

I've made a mistake. Am I in trouble?

This is another enormous source of tax anxiety. You discover something has been entered incorrectly.

VAT has been treated wrongly.
Income has accidentally been missed.
Something was included on a return that shouldn't have been.

Cue panic.

There's an important distinction between making a mistake and deliberately trying to misrepresent your tax position. HMRC's own guidance recognises this. Everyone has a responsibility to take reasonable care over their tax affairs but HMRC says that where somebody took reasonable care and an inaccuracy still occurred, an inaccuracy penalty is not due. Keeping accurate records and asking HMRC or an appropriate adviser when you're unsure are examples of taking reasonable care.

That doesn't mean mistakes don't matter. They need identifying and correcting properly. Depending on the type of tax, size and nature of the error, there are different procedures for putting things right. Discovering a genuine mistake doesn't automatically mean HMRC has concluded you've committed fraud. The worst response is often “I'll pretend I didn't notice.”

Once you know something is wrong, deal with it.

What if HMRC wants to check my business?

The words “HMRC compliance check” aren't likely to improve anyone's morning. Let's separate taking something seriously from immediately assuming the worst. HMRC carries out compliance checks to ensure businesses and individuals are paying the right amount of tax and receiving the correct allowances and reliefs. It doesn't automatically mean HMRC has already decided you've done something wrong. They may ask for information and records to establish whether the tax position is correct. If that happens:

Take it seriously.
Respond to requests.
Meet deadlines.
Keep your adviser informed.
Provide the information that's required.

If everything is correct, HMRC can close the check with nothing further to pay. If you've overpaid, you may receive money back. If you've underpaid, additional tax and interest may become due and depending on the circumstances, there may also be penalties.

A compliance check isn't something to ignore. Neither is it a reason to assume your business is about to be raided by people carrying calculators.

Sometimes a tax bill is actually good news

Stay with me here.

I'm not expecting anyone to say “Fantastic! My Corporation Tax bill has increased!”

Sometimes we need to look at why the bill has increased. If your taxable profit has grown significantly, your tax liability may have grown with it. That can mean your business made more money. Tax is the less exciting consequence!

When somebody tells us “I can't believe how much tax I've got to pay!” sometimes the other side of that conversation is “Yes, but look how much profit you've made.”

Would we prefer the tax bill were smaller? Of course but we'd generally prefer a larger tax bill arising from a healthy, profitable business to no tax bill because the business didn't make any money. Sometimes tax is a good problem to have.

Stop treating all the money in the bank as yours

This mindset can make an enormous difference, particularly with VAT and PAYE. A VAT-registered business may collect VAT from its customers and subsequently have an amount to pay to HMRC after taking account of allowable input VAT. Employers similarly deduct PAYE and National Insurance through payroll and have liabilities to pay over.

If all the cash sitting in the business bank account mentally becomes “My money available to spend”

then paying HMRC can feel like somebody has suddenly taken a chunk of it away. It can be helpful to think differently. Some businesses use separate savings accounts for tax liabilities. Others rely on good cash-flow forecasting and bookkeeping. The method is less important than recognising there are liabilities building up alongside the cash. The £20,000 bank balance doesn't necessarily mean you have £20,000 available to spend. Your Balance Sheet has been trying to tell you this all along. It just doesn't shout as loudly as your bank balance.

Good bookkeeping removes surprises

It isn't simply about producing tidy records. Good, regular bookkeeping gives you visibility.

You can see how the business is performing.
You can monitor profit.
You know what's owed to you and what you owe.
You can see VAT liabilities developing.
You can estimate future tax bills.
You can plan.

Tax becomes considerably less frightening when instead of “SURPRISE! £12,000 PLEASE!”

it's “That's roughly what we expected, and we've been putting money aside for it.” We can't make tax disappear but we can make it considerably less surprising.

What if I genuinely can't afford to pay?

This is where fear can become particularly damaging. There is a huge difference between “I can't afford to pay this tax bill.” and “I can't afford to pay this tax bill, so I'm going to ignore HMRC.”

If you're struggling to pay, engage with the problem.

HMRC says businesses and individuals who cannot pay a tax bill in full may be able to arrange a payment plan to pay the debt in instalments. What is agreed depends on the circumstances and what can realistically be afforded. HMRC can ask for information about income, expenditure, assets and other liabilities when considering an arrangement, particularly for company debts. Interest can also continue to make a debt more expensive, so a payment arrangement isn't free borrowing. The important thing is communication.

HMRC's current debt guidance specifically encourages taxpayers who cannot pay to get in contact so that a way forward can be discussed. It also makes clear that HMRC has much stronger debt-enforcement options where tax remains unpaid and somebody doesn't engage. If there's a problem, don't hide from it.

Get advice.
Understand the numbers.
Contact HMRC where necessary.
Make a plan.

Please don't let fear of HMRC make you fall for a scam

Fraudsters know that the letters HMRC frighten people. That's why tax scams so often use urgency and threats.

Pay immediately.
Your account will be closed.
There's a warrant for your arrest.
Click this link now.

Fear makes us act before we think.

HMRC's current scam guidance specifically identifies unexpected contact, threats, being rushed, requests for bank details or instructions to transfer money as warning signs. HMRC also maintains guidance allowing people to check whether particular calls, emails, texts and letters are genuine.

If something feels wrong, don't let the word HMRC frighten you into immediately clicking or paying. Stop and verify it.

You don't have to understand everything yourself

Tax is complicated. That's not a controversial statement. Corporation Tax, Income Tax, VAT, PAYE, CIS, National Insurance, capital allowances... Nobody hands you a manual when you start a business and says “Congratulations! Here's everything you'll ever need to know about UK taxation.” Even if they did, it would probably be out of date before you'd finished reading it.

Asking for help isn't an admission that you're bad at business. Part of the value of having bookkeeping and accounting professionals around you is having somebody who can translate.

Sometimes what a worried business owner needs to hear is simply:

This is what it is.
This is why it's happened.
This is how much you owe.
This is when it's due.
This is what we need to do next.

The tax hasn't disappeared but the fear often has.

Respect, not fear

HMRC has real powers. Tax deadlines matter. Accurate records matter. Paying the right amount of tax matters. Yes, a healthy respect for tax and HMRC is a very good thing.

But fear?

Fear makes us put things off.

It makes us avoid opening letters.

It makes us reluctant to look at our numbers.

It turns known problems into imagined catastrophes and manageable problems into bigger ones.

Instead, keep your records up to date to know what's happening in your business.

Put money aside for tax.

Open the letter.

Ask the question.

Correct mistakes when you find them.

If you can't pay, deal with the problem early rather than hoping it will disappear.

Respect HMRC. Plan for tax. Deal with problems when they arise but don't be afraid of it.