Tax Administration

Tax Administration

Enabling Letters — The Revenue Replies

MARJORIE WILLIAMS (Director — Inland Revenue Service Delivery Support) replies to points raised in previous issues of Taxation.

RECENT ARTICLES BY John Newth (Taxation, 29 July) and Mike Truman (Taxation, 9 September) raised a number of points about the recent issue of enabling letters by Revenue offices. In providing the background and context for this initiative, as well as addressing the issues they have raised, I hope to provide Taxation readers with a better understanding of the Revenue's aim and purpose in undertaking this activity.

The Department has a general duty of care and management (as established in section 1, Taxes Management Act 1970 and elsewhere) for the taxes which it administers. Our staff may contact customers in a number of contexts outside the formal section 9A letter that signals the start of an enquiry into business profits; for example, the workshops and educational visits made by business support team staff, or telephone contacts with customers and their agents to resolve minor queries that arise during the processing of returns.

Alongside providing general guidance and information, these contacts further the Inland Revenue's core purpose of helping ensure that everyone understands and receives what they are entitled to and understands and pays what they owe, so that everyone contributes to the United Kingdom's needs.

There are some areas of common error that lead to understatement of business profits, affecting significant numbers of returns. Not only do these errors present a real risk of tax loss to the Exchequer, they increase the burden of tax for other taxpayers. Even where an agent is acting, the formal enquiry procedure that we use to correct tax return mistakes after the return has been submitted can be viewed as unwelcome, costly, and time consuming for our customers. By providing targeted guidance on such areas of error, the Revenue aims to help people to get things right in the first instance, before they submit their return, minimising the likelihood of an enquiry.

We use risk management procedures to identify cases for formal enquiry. The Revenue does not disclose the procedures, as indeed the reason for initiating a section 9A, Taxes Management Act 1970 enquiry is not disclosed. But it is no secret that we analyse by computer both business expenses claims and other factors such as turnover and comparison with apparently similar businesses. Helping people to avoid errors is an important part of our overall compliance strategy. We firmly believe that pointing out things we commonly see that people get wrong, or that we might need to enquire into if they appear to feature in the return, is likely to be a more welcome approach than a formal enquiry. And, by keeping formal enquiries to the minimum number that is consistent with the Revenue's responsibilities of care and management, we can concentrate our resources on cases where the risk of tax loss is greatest.

Turning to some specific issues raised by John Newth and Mike Truman in their articles, where the client record shows that we hold a formal authority for an agent to act on their behalf, the agent should receive a copy of the letter and any attached guidance.

There was consultation with members of the professional bodies, both locally and at national level, about this and other projects, and discussion continues. A number of advisers have expressed their support for the intention of the initiative, although there are varying opinions about how this may best be achieved. We take the views of agents very seriously and active consideration of how we can improve our approach is under way. The initiative was not intended to cast doubt on the skills of professional advisers. However, our research into the outcome of completed enquiries suggests that expense claims are incorrect in a significant number, even when an agent is acting. So we cannot exclude represented customers from direct contact where we have genuine reasons for considering that there may be errors or oversights.

John Newth suggests that practitioners should respond to the receipt of an enabling letter by 'assuming' that it comprises a notice of enquiry into the 2003 return. Mike Truman speculates about the possibility of interpreting it as an enquiry into the 2004 return. It seems surprising for agents to seek a formal enquiry into their client's return since this will undoubtedly be more time consuming and costly, unless there are exceptional reasons for wishing to achieve certainty on the tax liability for a particular year.

Although on current practice there is no reference to the section 9A legislation when a notice of enquiry is issued, it is a legal requirement that the notice states that the officer of the Board intends to enquire into the return. The enabling letter by contrast states its aim is to avoid the need for an enquiry and it is not a notice of enquiry within section 9A. John Newth's suggested response, based on an AccountingWEB site entry, refers to a version of section 29, Taxes Management Act 1970 that applied before the introduction of the self-assessment legislation and is not the current version outlining the circumstances in which a discovery assessment may be made.

To conclude, I would repeat that one of our strategic compliance aims is to help customers to be in a position to comply with their obligations. We see as a positive step towards securing compliance this exercise of pointing out where we think errors may have occurred to help prevent them appearing in future. The risk assessment processes we use depend on the information provided on the return and, to the extent that issues arise, we are working with representatives of the profession to address them.

Editorial comment

There is much in this reply that is positive. I welcome the repeated reference to working with representatives of the profession, and the expressed readiness to improve the approach where necessary. I do, of course, support the stated intention to ensure that people have the necessary information to get their tax returns right first time, and to alert them to frequently encountered errors.

The reassurance that agents should receive a copy of the letter is welcome, although it appears that in some instances this has not happened. The points about section 29 and section 9A were dealt with in my article, some of them slightly tongue-in-cheek, but under the subheading 'Pull the other one' I agreed that the arguments based on these sections did not hold water.

It would have been good to get a clear response to the final paragraph of my article, asking for an assurance that the Inland Revenue would check whether explanations had been given in the white space before issuing next year's returns but, given the level of complaints this year, I am sure that they will.

The fundamental problem still remains, however. The implication of the enabling letter and of this response is that, by and large, the recipients of the letters do have something to correct — their returns for 2003 probably were wrong. The more I talk to accountants whose clients have received the letters, the more I think that this is incorrect. Most recipients seem to be taxpayers whose business is a little out of the ordinary compared to others of the same type — normally because they genuinely work from home.

Until the enabling letters stop implying that the previous returns are dodgy, and start being clear about the basis on which they have been sent out, they will continue to be an irritation in the relationship between the Inland Revenue and advisers.

Mike Truman

In addition to Mike's comments, I should like to highlight the fallout from these letters. As mentioned in the national press, in some instances the letters have done irreparable damage to relationships between the Revenue and practitioners that local Inspectors had spent years in building up. The letters also cast a cloud over the valuable work that is done by the Working Together Groups. They have also not helped the perception of the Revenue by small businesses.

John Newth

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