We’re only human - the psychological impact of tax investigations

Professional exams prepare an adviser well for handling the technical aspects of tax enquiries. Practical skills are acquired through experience over many years. There is, however, generally little or no training for handling the psychological impact, yet this can be the most difficult aspect to deal with and the one that sticks in the mind long after the enquiry has ended. 

The boundary between professional and personal life can become blurred for both advisers and clients. In this blog, I want to look at how that blurring can affect the progress of the enquiry.

The client’s perspective

Some clients know they’re at risk of enquiry, either because there’s genuine doubt over the tax treatment of an item in their return or because they have withheld information from their adviser. For most, however, an enquiry is unexpected. 

Where there’s doubt over a tax treatment, the advisor will have fully disclosed it in the return, prepared the client for the technical argument, HMRC’s likely questions and the process that will be followed. Knowing what’s to come helps the client to prepare for the uncertainty that will hang over them until the matter is settled. As time progresses, frustrations may surface, but generally, they can be managed.

When the enquiry is unexpected, its impact depends upon its nature and extent. A simple technical or factual query may be easily and swiftly dealt with. A more detailed enquiry can extend over a significant time period and involve the need to produce specific documents or information. That information can – in a residence or domicile enquiry, for example - extend to matters that the client regards as highly personal. Being asked to produce evidence of dates of travel, intention to settle, intention never to return and so forth can be difficult practically and intrusive personally. What may seem to the client a simple matter of privacy may, to a tax inspector, look like an attempt to conceal. That can lead to tensions between the inspector and the client, which the advisor must endeavour to manage. 

If the inspector feels that some questions have not been fully answered, then inevitably, more will be asked. From the client’s perspective, this can feel like a fishing expedition where the tool has changed from fly-rod to trawl-net. The client has, in their mind, become a victim of an unfair system. Frustration can change to anger. 

The advisor’s perspective

The advisor - acting for the client and in their best interests - must manage any tensions that arise. In a routine enquiry, this will normally be an easy matter, but if an enquiry drags on or the technical arguments begin to appear less strong, that can change. Persuading the client that these things take time becomes more difficult as time progresses. I can remember enquiries that were settled simply because the client had had enough of the stress and uncertainty, but which could have been concluded very differently if they had been willing to continue. 

Managing that kind of stress is a matter between the client and the advisor. When the stress turns to anger - as it sometimes can - it can involve the advisor having to keep that anger from the inspector or, if it erupts in a meeting, manage it. Professional exams do not prepare advisors for this; even decades of experience cannot always do so, as every situation is different. We are, after all, only human.

Being prepared

Preparation is often the deciding factor in successfully concluding an enquiry. If a tax treatment is uncertain, the position will have been thought through very carefully, discussed with the client, fully disclosed to HMRC and the questions anticipated. Any necessary documentation will be in place.

The best evidence is contemporaneous: records kept in real-time and the reasoning for decisions recorded in, for example, board minutes or exchanges of correspondence. In a case where residence or domicile is a factor, keeping careful records over a period of years can massively reduce the stress of an enquiry if and when it comes. It’s important to know what to keep and to be disciplined in keeping it, and this is where regular meetings between client and advisor really pay off: delivering the best advice requires an understanding of the client as a person, not just a set of facts. The human factor again.

The human factor

Over the years, numerous clients have said to me – during or at the end of enquiries - “You’re always so calm”. I have always tried to be because, for me, being calm is an essential part of being a professional. Underneath the surface, however, things were sometimes very different. Loss of sleep, constantly pondering potential outcomes, the feeling in the pit of the stomach when you think you have missed something fundamental (and the relief when you find that you haven't), the strain of being the go-between, worrying about the client’s wellbeing. 

Those stresses can take their toll. 

Balancing the technical, practical and psychological factors comes down to training, experience and judgement. But advisors and clients are human beings and stress can have a huge effect. I’m a firm advocate of being open with colleagues about stress levels and of advising clients to share their worries with close family. We all need someone watching over us at these times. 

Safe landing

In tax enquiries, as with so many things in life, planning and preparation can make a huge difference in minimising the stress involved. As a former colleague once said to me, “time spent on preparation is rarely wasted”. He was right about that. But there’s something equally important: remembering throughout that we are all only human.