Date: 30 August 2011
In this article, 2020 Tax Protection runs through the main powers that HMRC now have and some of the issues we have come across whilst handling their approach so far.
April 2009 saw the introduction of HMRC’s new compliance powers. Many practitioners are still unsure of what HMRC can now do and a degree of misinformation is circulating. We consider the new powers and what they actually mean.
HMRC’s new powers to inspect documents and to visit business premises are provided by Schedule 36 Finance Act 2008.
From 1 April 2009, HMRC officers dealing with direct taxes have been able to inspect records and visit premises, bringing their powers in line with those of VAT and employer compliance reviews. The new powers are dealt with in various parts: -
Requesting Information or Documents (Part 1)
Part 1 allows HMRC to give written “information notices” to taxpayers (“taxpayer notice”) or third parties (“third party notice”) requesting information and/or documents which are reasonably required for the purpose of “checking the taxpayer’s tax position”. Information notices can also be used where the taxpayer’s identity is not known. Information can be requested in advance of any return being submitted which is a major change in respect of income, corporation and capital gains tax. The information must be supplied within a “reasonable time” as specified in the notice. Commonly this is thirty days.
Some negotiation may be needed in relation to the scope of the notice and the amount of time reasonably required for compliance. This should be done at the outset, not when the time specified for compliance is about to expire. Similarly it is not unreasonable to ask HMRC to indicate when they will respond to the information provided.
HMRC must have the permission of either the taxpayer or the First-Tier Tribunal before they can issue a third party notice and a copy of such a notice must be sent to the taxpayer.
No taxpayer notice can be given in respect of a period where the taxpayer has submitted a self assessment return under TMA 1970 s8, s8A or s12AA or under Sch 18 FA98, unless:
- that return is under enquiry;
- HMRC suspect that insufficient tax has been accounted for; or
- it is required for checking the taxpayer’s VAT or PAYE position.
Third party notices are not subject to the same restrictions.
Notices given to check the position of a deceased taxpayer must be issued within four years of their death.
HMRC are not obliged to provide tax advisors with copies of notices sent to their clients. However, most officers will do this as a matter of courtesy in direct tax cases, providing that the agent has a 64-8 in place.
We have been made aware of a number of cases where the agent has been told that they will not be involved in a visit or receiving documents as they did not have authority to act in relation to VAT. The agents have later found that there is a full enquiry including direct and indirect tax. In one case, HMRC visited clients and pressurised them into answering questions which required consideration; had the client been properly represented, responses would have been deferred. The client had thought from the tone of the letter that it was a straightforward VAT and PAYE visit. The client’s letter did show that it was a full enquiry but he thought his agent knew all about it and did not bother telling him. Professionals will need to ensure your clients let you have copies of any such letters from HMRC as soon as they are received.
There is a right of appeal against information notices (see below).
Inspecting business premises (Part 2)
HMRC can request entry to business premises and inspect the premises as well as business assets and business records that are on the premises, where the inspection is reasonably required for checking the tax position.
HMRC cannot enter premises (or parts thereof) that are solely used as dwelling houses. If for example, a landlord keeps his property business records at home, HMRC are able to enter those premises and inspect only those rooms where business records are kept. Clients do have the right to say no and take professional advice.
It is important to remember that the legislation provides a right to request entry and does NOT confer the right to search. HMRC are only able to inspect documents that are on show. They can ask for you to provide documents but you do not have to provide these on the spot. HMRC have no right to open draws etc to get to documents.
If a time for HMRC to visit has not been agreed in advance with the taxpayer, HMRC must give the occupier of the premises 7 days notice of the inspection (which does not have to be in writing), otherwise the inspection can only be carried out with the agreement of an authorised HMRC officer or the First-tier Tax Tribunal. HMRC have stated that the latter is only likely to be used in serious cases and a code of practice is to be issued covering inspections where no advance notice has been given. Again, clients have the right to take professional advice and to decline entry. Where approval has been given by the First-tier Tax Tribunal, refusal may incur a penalty. The initial penalty cannot exceed £300 which may be a worthwhile cost in the long run.
There is considerable scope for confrontation, confusion and an abuse of process. It is essential that proper professional advice is taken at the time.
There is no right of appeal against the inspection of business premises. These do not just happen at the year end and can happen at any time, they are live in year reviews.
Copying and removing documents (Part 3)
HMRC officers are able to take copies of documents which they have inspected. They may also remove such documents and retain them for a reasonable period. Where documents are removed, HMRC must provide a receipt to the taxpayer without charge. Officers may also mark business assets which they have inspected and can record information (including electronic formats) regarding the premises, assets and records.
Restrictions on powers and provisions for auditors and tax advisors (Part 4)
First and third parties are required to produce information or documents which are within their possession or power. First and third parties are not required to produce information that is the subject of a pending tax appeal or which is subject to legal professional privilege.
Auditors and accountants cannot benefit from legal professional privilege and the legislation offers them limited protection as to the information they do not have to supply.
Paragraphs 24-25 state that information/documents held by the advisor which relate to audits and tax advice provided to a client need not be supplied. However, paragraph 26 allows HMRC to request information/documents in connection with items which have been delivered to HMRC. Note that a client will have to supply copies of advice he has received from his tax advisor where the client holds that information.
Appeals against information notices (Part 5)
Appeals against taxpayer and third party notices are to be made to the First-tier Tribunal in writing and within 30 days of the date the notice was given and must state the grounds for the appeal. If the Tribunal upholds the information notice, it will specify a further deadline for complying with the notice. The decision of this Tribunal is final.
VAT records and provisions for groups and partnerships (Part 6)
Where an information notice relates to statutory VAT records, there is no right of appeal against such a notice and third party notices do not require the approval of the First-tier Tribunal. Third party information notices issued in respect of a group of companies only have to refer to the parent company but are deemed to cover the whole group. If there has been a change in ownership of a company, HMRC may issue an information notice for a period for which a return has been made; where they suspect that certain anti-avoidance provisions in ICTA 1988 may apply. A partnership self assessment return under s12AA TMA 1970 is deemed to have been made by all of the partners, so HMRC cannot issue an information notice if that partnership return is still under enquiry.
Penalties (Part 7)
There is a standard £300 penalty for failure to comply with an information notice, obstructing an officer of HMRC or destroying/concealing documents, unless there is a reasonable excuse. A daily default penalty of £60 per day can be charged for continued failure after the standard penalty has been issued.
In addition, HMRC can apply to the Upper Tribunal for a tax-geared penalty to be imposed for continued failure to comply with an information request after the standard penalty has been issued. The Tribunal will determine the amount of any such penalty. Penalties must be issued within 12 months of the date to which the failure relates and these can be appealed against by giving notice in writing to the First-tier Tribunal within 30 days of the date of issue. Again, reasons for the appeal must be given.
Concealing or destroying documents (Part 8)
Those found guilty of concealing or destroying documents following the issue of an information notice, or after receiving informal notification that such records may be required, face fines and up to two years in prison.
Going Forward
In order that we may properly advise our clients we all need to be aware of our responsibilities and rights under the new rules which are intrusive and complex. This document provides only a brief overview. For more information please contact info@2020taxprotection.com
