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SIMON SWEETMAN examines the Revenue's and Chartered Institute of Taxation's joint review of income tax self-assessment enquiries.
THE CONDUCT OF Revenue enquiries under self assessment has been the subject of much criticism. My own view was that the Inland Revenue had not taken on board the differences between an old style investigation and a new style enquiry, except perhaps where it suited it to do so (see my article 'The Wrong Spirit' in Taxation, 23 November 2000 at pages 205 to 207).
SIMON SWEETMAN examines the Revenue's and Chartered Institute of Taxation's joint review of income tax self-assessment enquiries.
THE CONDUCT OF Revenue enquiries under self assessment has been the subject of much criticism. My own view was that the Inland Revenue had not taken on board the differences between an old style investigation and a new style enquiry, except perhaps where it suited it to do so (see my article 'The Wrong Spirit' in Taxation, 23 November 2000 at pages 205 to 207).
Then came the joint review of income tax self-assessment enquiry work carried out by the Revenue and The Chartered Institute of Taxation, which threw up many of the same points. That review was referred to a working party set up by the Revenue Operations Consultative Committee (a joint body which exists to review the day-to-day workings of the system). Following that party's work, the Revenue has included an article in Working Together issue 8 giving a revised framework for enquiries under self assessment.
The article in Working Together gives the Revenue's view of the outcome of these discussions. Not everything said in Working Together is agreed by all sides, but it does correct some of the more obvious abuses and makes it easier to conduct an enquiry on a proper basis.
If there is a general tone to these changes, then it is in the direction of more intelligent working. It really is not right to open an enquiry with 'send me everything you have got and answer all the questions I can think of, relevant or not', and the Revenue has recognised that.
Faster working no longer exists, but the principles of faster working, including the agreement of a timetable for the enquiry and (where possible) an aim for both sides to reply within 15 days, are taken into the new framework. What is most important here is that deadlines should be mutually agreed, rather than unilaterally issued.
Opening letters
A consistent complaint about opening letters was that they read like the first draft of a will received from a solicitor: the word processor has picked up every conceivable paragraph that might be mildly relevant and slung it in.
This paragraph refers to 'items which were not used in the accounts but which are relevant and can reasonably be required in checking a return, e.g. appointment diaries'. This is not a point on which there is consensus, and my view is that the legislation does not in fact require appointment diaries to be retained. Indeed, as more people use electronic diaries and do not keep a record of past appointments, the less relevant they may become. Furthermore, they are not mentioned among the records that ought to be kept in the booklet SA/BK3.
Opening letters will now say whether the enquiry is a full or aspect enquiry. This is especially welcome when the letter arrives on the taxpayer's doormat on Saturday, and it is not until Monday that he finds out that all that is required is a pension certificate. In addition, the complete letter will be copied to the client. This appears to be an issue on which there are views on both sides, but I have never seen the point of the practitioner keeping the letter away from the client.
Early meeting
An early meeting is one between the Inspector and agent to talk about the records. This comes from the old faster working proposals, and the main point is to prevent time being wasted while the Inspector sorts out his own misunderstandings and misreadings of the accounts. Any set of small business accounts will throw up problems which are apparent rather than real and which can be solved by reference to things that the agent knows already.
This is one of the proposals that is going to require cultural change, probably from both sides. Some accountants in general practice do not have the confidence to argue with the Inspector and are effectively afraid of contact.
Every meeting should have an agenda issued in advance. It has taken years to get agreement on this point, and it is important.
Inspectors are to be encouraged to be flexible about the place and time of meetings. It is worth noting, however, that nothing is said about meetings taking place at the agent's premises, which is the 'third way' here.
Non-business bank statements
There is something gained in respect of non-business bank statements. The article stresses that private bank statements are not to be sought 'as a matter of course', and that depositing regular drawings in an account does not make it part of the business records. Arguments will still occur, but there is anecdotal evidence of General Commissioners taking a robust line on this and refusing the Revenue access. I should be interested to hear of more such cases.
Management and guidance
The Revenue wants to improve the working of enquiry cases through training and revised guidance, and that could ultimately be the most important thing of all. The Revenue's new quality standards, on the face of it, will encourage effective working of cases rather than maximising of returns. That must include having the courage to close down a case when it is going nowhere, rather than looking for crumbs.
In my view these changes and, especially, the way in which they have been arrived at, give real grounds for hoping that Working Together might be something more than a slogan.
Simon Sweetman is an independent tax consultant (www.simonsweetman.co.uk); telephone 01394 274857.
