When the taxman swoops ...

There is nothing like the terror that can be struck into the hearts of normally tough business folk by a visit from the tax authorities. The VAT collector has long been feared simply because he or she comes under Customs & Excise, where the traditional role of combating drug smugglers and the like has involved greater investigatory powers than those at the Inland Revenue. But the coming introduction of self-assessment of income tax, combined with what appears to be a government policy to maximise receipts to avoid tax rises, threatens to extend this reputation to tax inspectors.

"They are chasing debts more vigorously than they used to and looking for undisclosed tax liabilities," says David Williams, tax technical partner at Smith & Williamson, an accountancy firm in the West End of London.

In particular, much greater emphasis is being placed on investigation work than when he was in the Revenue several years ago. Whereas that sort of work used to be regarded as a sideline, it is now attracting increased resources at a time when other parts of the organisation are being cut back. Moreover, substantial hauls from investigations are reckoned to be good for career progress.

Such a change of approach has such wide ramifications that larger firms of accountants that have traditionally hired former Revenue officials to give them an inside track on the organisation's workings are seeing potential business in helping clients and other professional firms to cope with the unwelcome attention. For instance, Smith & Williamson, a middle-ranking firm that also operates a private bank, has converted an existing service into a fully fledged product. Though it is targeting the lower end of the market, where its sort of expertise is less common, it is also seeking to offer what amounts to litigation support to larger practices.

The service was formally launched earlier this year, when another former Revenue official, Gary Morris, joined the firm. The idea, says Mr Williams, is to take over the handling of such an investigation from a small firm of accountants or solicitors that might feel swamped by it.

Clearly even small firms will feel able to represent clients in straightforward situations. But Mr Williams and his colleagues anticipate a substantial increase in coming years in the numbers of inspections by the special units, which look into suspected serious frauds where they are typically looking to collect up to pounds 100,000 in back taxes and penalties.

Up against Revenue staff who can devote themselves to the task because they have nothing else to work on and are motivated by the fact that a success will do their careers no harm, a typically hard-pressed small firm or sole practitioner could find itself at an acute disadvantage, adds Mr Williams. If it puts a lot of time into defending the client it puts its other clients at risk; if it gives the matter only cursory attention it is in danger of being outmanoeuvred.

The Smith & Williamson team aims to help firms out of this dilemma by offering, for a fee, to use its experience and knowledge of how the Revenue works to step in and handle the inquiry, or to give ad hoc advice on particular aspects. It points out that such things as the conduct of an appeal hearing, preparing for a meeting or even deciding whether there should be such a meeting are special skills in this area.

The service is aimed at lawyers as well as accountants because it recognises that many people's first reaction on being told they are the subject of a tax investigation might be to contact their solicitor rather than their accountant - or they may blame the accountant for getting them into the situation in the first place.

Either way, the firm is sufficiently aware of potential sensitivities involved in urging firms to accept that they may not be able to handle a client's affairs, that it pledges not to try to lure the client away for other work. But when asked what happens if the client volunteers to move, Mr Williams admits: "It's a free country."

Deciding how successful the Smith & Williamson team has been can be difficult to judge. In some cases, particularly when random investigations are introduced as part of the self-assessment regime, the client may have a totally effective defence but in others the situation is less clear cut.

Mr Williams and Mr Morris point out that even when the business or individual concerned is liable for tax there are several things that can be done on their behalf. Penalties, for instance, can amount to 100 per cent of the total tax bill. But they can be almost negligible. Likewise, it is possible to limit how many years the Revenue is seeking to go back; it has the power to go back up to 20 years, but an effective argument can reduce this substantially. Finally, tax officials are increasingly likely to be receptive to giving time to pay.

According to Mr Morris, it's quite simple. "If you keep the tax down, you keep the rest down."

Smith & Williamson is holding a seminar on tax investigations in the evening of 2 November. Contact Ann Monks on 0171-637 5377.