HMRC is also looking for opportunities

It's not only business that's looking for ways to increase the amount of money available from all sources. HMRC has the Treasury's spending plans biting at its collective heels and equal pressure to cut costs. Among the costs they want to cut is what the Treasury sees as the "tax gap" – the difference between what the Treasury actually receives in tax and what it would like to receive in tax. The last few years have seen a steadily rise in anti-avoidance legislation as the Treasury plugs loopholes in tax law. HMRC has already let it be known that a number of areas will be under greater scrutiny this year.

Companies are still currently dealing with tax returns for accounting periods ending in 2008 – reflecting profits earned during 2007. At this time, current economic news was barely beginning to have an effect. Profits at that time were still fairly reasonable – or better. The tax bill on those profits will also be reasonable. Last week, our alert looked at possible ways to cut the cost of expenditure now. Those ways of cutting cost may still apply to costs incurred in 2007: capital allowances and R&D allowances etc can still be claimed to reduce profits and tax.

While considering what you can do to minimise tax bills that are due now, be aware that HMRC is actively considering what it can do to maximise tax bills that are due now – and over the next few years. Raising taxes is always unpopular, so the Treasury (and hence HMRC) is looking at ways of increasing the tax take while minimising the increases in taxes. One (relatively) quick way to do that is to look ever more closely at company tax returns and accounts to raise enquiries.

The principal areas of risk are those areas where a degree of commercial subjectivity is involved. It has already become clear that HMRC will, for example, be examining transfer pricing (intra-group pricing) of intellectual property more closely: a market price for a licence fee has many variables and will fall within a range of possible prices; in the search for more income, companies and HMRC could find themselves arguing about which end of the range is more appropriate.

What can you do about this?

Companies with well-prepared documentation and records to justify (for example) a transfer price will find it much easier to respond to HMRC queries quickly and substantively. This gives HMRC much less room to manoeuvre. A quick, full, response can close an enquiry quickly.

It's not only the main corporate tax return that is at risk – PAYE and VAT enquiries are also increasing. Anecdotal evidence suggests that small issues which might normally have been mentioned in passing by HMRC are now being picked up and adjustment raised. With that, HMRC is also becoming more inclined to go to litigation in the Tax Commissioners (soon to be the Tax Tribunal), rather than settling on tax costs.