Trouble with Corporate Tax Self Assessment?

Revenue techniques in the field of corporation tax self assessment enquiries are put under the microscope by ANDREW NUTBROWN and RICHARD WYNNE.

CORPORATION TAX SELF assessment brought major changes to the way that companies are expected to deal with their taxation responsibilities. New time limits, additional requirements in respect of transfer pricing and controlled foreign companies, the introduction of quarterly payments and explicit record keeping responsibilities are all now in place.

As is necessary with any self-assessment system, measures exist to enforce compliance with the régime. These consist of penalties, interest, surcharges and the Inland Revenue's entitlement to look in detail at any return without giving a reason. The Revenue can also issue formal notices for the production of information and particulars, even in electronic form, without recourse to the Commissioners, by virtue of paragraph 27 of Schedule 18 to the Finance Act 1998.

So, what is the reality of this new system? How is it working? Is the Revenue adopting a new approach or is it the same old system in a shiny new wrapper? PricewaterhouseCoopers has analysed over 500 notices of enquiry, providing a useful guide to some of the key trends and issues under the corporation tax self assessment enquiry régime and how it is working in practice.

Varying time limits

The first area of note relates to time limits for producing information to the Revenue. The normal process should be that the Inspector issues a notice of enquiry and asks for information to be produced within a certain time. This initial request is informal and usually accompanies the notice of enquiry. Theoretically, the enquiry notice could be accompanied by a formal demand, but we have not yet seen a case where this has happened. However, if the information is not received within the time set out in the informal request, then a formal notice will follow.

In 53 per cent of the cases we reviewed, no time limit for responding to the informal request is given by the Inspector. In the remaining 47 per cent, the time limit varied widely, from 14 days to 112 days. We find that the most popular informal time limit is six to eight weeks, but this inconsistency is worrying. Most, but not all, Inspectors offer to negotiate if representations are made to them that the suggested time limit is unreasonable. One notice setting out a 14 days time limit is phrased in a way that suggests that this is now Revenue policy. A number of follow-up letters have been seen where no time limit was originally given and yet the Revenue has intimated that a formal notice will be issued shortly for a failure to produce information.

Surely the Revenue should be aiming to standardise its procedure in this area, so that everybody starts from the same place and has clarity.

Amount of information

We noted that the amount of information requested varies considerably. Most enquiries look exactly like old style letters from the Revenue, with an opening paragraph effectively cut and pasted into the letter to confirm that this is an enquiry under corporation tax self assessment. Inspectors cling to old habits and still ask politely for replies 'at your earliest convenience', even though they have the right to the information.

Matters for enquiry

The main areas under enquiry also look familiar. The most popular areas for enquiry are as follows:

• repairs and capital allowances - 16.5 per cent
• legal and professional fees - 15.7 per cent
• accruals - 15 per cent
• provisions - 13 per cent
• group related issues - 11 per cent
• debtors/creditors - 11 per cent
• stock - 11 per cent
• international issues (including transfer pricing) - 5 per cent
• entertaining - 5 per cent

This analysis gives companies interesting food for thought. How robust are their returns in the most popular enquiry areas and how will they stand up to detailed Revenue scrutiny if selected for enquiry? Experience tells us that the Revenue targets the above areas because the yield is larger and consistent. If the Treasury intends to maintain rising tax receipts, particularly as growth in the economy slows, it would not be surprising if it continues to target those areas of accounts and computations that regularly produce substantial amounts of additional tax.

It is also noticeable that more and more enquiries involve newly recruited Revenue accountants who are homing in on areas such as provisions and stock where they perceive the tax risk to be high.

Among the letters sampled, we found some that set a different and very challenging agenda. These letters included demands for:

• information to be provided in a very short period;
• information on every possible subject;
• information from professional advisers and auditors, e.g., link papers;
• meetings with clients at their business premises in the opening letter; and
• the receipt of all accounting records in electronic form, accompanied by the offer of a Revenue team to extract this if necessary.

(See PricewaterhouseCooper's TaxScannerTM service in the technology supplement of 25 October 2001 issue of Taxation.)

We are still in the infancy of corporation tax self assessment enquiry work. There is insufficient evidence available currently to allow us to identify trends in the way the Revenue is using its formal information powers, to understand whether enquiries are taking longer, and to decide whether the attitude of the Revenue to enquiries has become more aggressive. Further reviews as more time passes will give us answers to these questions.

Andrew Nutbrown and Richard Wynne, are senior manager and manager respectively in PricewaterhouseCoopers' tax investigations business. They can be contacted on 0121 265 5228 and 6526 respectively.

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