Working the Enquiry: Meetings: Testing Explanations - Non-Taxable Sources
The taxpayer might admit to the existence of undeclared investment income or gains but claim that the underlying capital arose from a previously taxed or non-taxable source.
There will be occasions when you will be able to accept that the omission from the return is due to an oversight or misunderstanding, and the underlying savings originate from a taxed or non-taxable source which can be proved or which you accept having talked to the taxpayer and weighed up all the facts and explanations.
But many such claims involve cash hoards, betting wins, gifts, legacies, sales of personal assets EM2050+. Deal with such stories firmly and try to obtain as much corroborative evidence there and then. If the explanation being offered is untrue, often the taxpayer will be unable to sustain his or her story under close questioning EM2053.
Our view is that concealment of investment income or gains from both an agent (if acting) and HMRC suggests that the source of the underlying capital is itself suspect. Tell the taxpayer that in the absence of convincing and detailed proof of both the alleged source and the amount, you will not accept the explanation. You can explain that you may close the enquiry making an appropriate amendments and raise appropriate discovery assessments. If they appeal to the tribunal, the tribunal may require the same proof as you are now requesting.
Where the taxpayer says the capital was saved from drawings or other declared income, you will have to decide whether this is at all likely in the light of personal commitments, investments and income.
You must never allege that there has been some greater irregularity than the known or admitted omission until you are reasonably certain that it has occurred. You should not allude to penalties until you are reasonably certain that
- the taxpayer’s conduct is likely to have been fraudulent or negligent, or
- for periods beginning on or after 1 April 2008 where the filing date for the return is on or after 1 April 2009, the taxpayer’s behaviour is likely to have been deliberate or careless CH81140+.
Above all, never in any circumstances use words or phrases which could be construed by the taxpayer as a threat.