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THERE WAS A time when TMA 1970, s 20 used to be special, little used by local tax offices and more a tool of Special Compliance Office. Just as a reminder, s 20 (see box below) allows a notice for the production of information to be issued by an Inspector after having applied for and received the consent of a General or Special Commissioner. For the ordinary Inspector of Taxes, it had a 'handle with care' label on it and when a s 20 notice was obtained, the event was specially recorded in an establishment file and formed part of the Inland Revenue's statistics. The power was used sparingly and the profession would sit up when it was mentioned; it was the 'big gun' of the Inland Revenue.
As can be seen by its wording below, a notice under s 20(3) can be used to force anyone to produce information. So in a company investigation, the company directors and company secretary may be compelled to provide information. It can also be used to force banks to provide all the information they hold on customers, and this can be considerable, including notes of contact with customers, instructions to move monies, etc.
Due process
There were and are specific procedures for the use of s 20. The HMRC Enquiry Manual says that:
'TMA 1970, s 19A and FA 1988, Sch 18 para 27 ('Notices to supply information issued by the Inspector') were introduced to support enquiry work under self assessment. These are the dedicated information powers for enquiries into self-assessment tax returns
and, where suitable, must always be used in preference to section 20 ... notices.
'Where you consider giving notice under s 20(1) for documents or particulars relevant to an accounting period at a time when the enquiry window for that period is still open you must make a report (This text has been withheld because of exemptions in the Freedom of Information Act 2000) before making any request, whether formal or informal. Cases where this would be appropriate are likely to be restricted to those working with a specialist operational office such as Special Compliance Office or Special Investigations Section (EM2201).'
Furthermore, TMA 1970, s 20B(1) provides instructions as to the use of such notices.
'Before a notice is given to a person by an inspector under TMA 1970, s 20(1), (3) or (8A), or under s 20A, the person must have been given a reasonable opportunity to deliver (or, in the case of s 20(3), to deliver or make available) the documents in question, or to furnish the particulars in question; and the Inspector must not apply for consent under s 20(7) or (8A) or, as the case may be,
s 20A(3), until the person has been given that opportunity.'
Section 20 cannot be used to obtain the following:
- tax appeal material (see EM2613);
- personal records (EM2617); or
- journalistic material (EM2617).
The warning letter issued before asking the Commissioners for a s 20 notice, which of course is ex parte, must:
- draw attention to the powers available under s 20(1);
- set out clearly what documents or particulars are required;
- indicate that a formal notice will be sought if the documents or particulars are not produced by a specific date; the time to be allowed should not be less than 30 days, but more time may be given if, for example, extensive particulars need to be compiled;
- ask whether the taxpayer wishes to make any written representations which can be put to the Commissioners (EM2437); and
- include a short warning along the lines of 'it can be a criminal offence intentionally to falsify, conceal, destroy or otherwise dispose of any of these documents before they have been produced to the Revenue'. (See EM2425.)
So what has changed? Nowadays, HMRC Inspectors use s 20 as routine, sometimes even where other powers are available instead. And commonly its misuse is because the Inspectors want sight of private bank statements in a company investigation and have not opened an enquiry into the personal tax returns within the income tax self- assessment enquiry window of twelve months from the filing date of the return. If they had, then of course the TMA 1970, s 19A powers mentioned above would be available to them.
Section 19A confines the Inspector to information for the year under enquiry, whereas s 20 enables the Inspector to request information outside the normal enquiry period. But if s 20 is being used because the dedicated self assessment powers (e.g. s 19A) cannot, then s 20 should not be used to obtain more information than would have been obtained under the dedicated powers. It should not be used to extend enquiries into other years just because the Inspector can with s 20.
Nor should it be used to obtain information from third parties, e.g. banks, if the taxpayer is co-operating. A direct approach by HMRC to a taxpayer's bank can obviously have a very detrimental effect on the taxpayer's future relationship with the bank.
Frequent threat
The more frequent threats to use s 20 may have arisen because many senior inspectors from what was Special Compliance Office (SCO) — now Special Civil Investigations (SCI) — have become Area Directors and encourage the use of s 20. But there is a big difference between SCI and district cases. The bread and butter SCI case is almost always 'broken' when it gets to SCI, with taxpayers knowing that they are in the wrong, and that they are in the wrong 'big time'! Not so with district investigations, where Inspectors are testing returns and accounts to establish if there is anything wrong.
All Inspectors reading this article of course are saying — well if the information was provided, there would be no need for any action. However, sometimes the taxpayer or his agents have been away; or sometimes the taxpayer is away on business making the profits that generate the tax to run the country! Sometimes the taxpayer has applied for the information from a bank for example and the bank is slow in providing it; and perhaps the taxpayer has been dealing with the bank over the phone and has nothing in writing from the bank to demonstrate the position.
Commonly, the taxpayer has merely dared to question why the information is required because he feels it unnecessarily intrusive. In this situation, the response from the Inspector can be little more than the same request for the information and the warning letter above with its references to criminality. It is this last point that gives most grief.
At district level, the taxpayer is an ordinary business man who may be near the end of his business life, has provided jobs for many people, paid over large sums of PAYE on his salary, paid corporation tax, etc. for years and now finds the phrase 'criminal offence' used in correspondence from HMRC, when there may be nothing wrong with his tax affairs other than low private or technical type adjustments, small omitted benefits in kind, etc.
And the speed at which this happens and the damage it does to the relationship between taxpayer and adviser can be devastating. This relationship is very important to everyone concerned at all stages of the enquiry. Commonly, the adviser must constantly explain to his client why his returns and accounts are being investigated, how the enquiry will proceed and generally put HMRC's action into perspective. Crucially, at the end of the enquiry, the adviser may have to use all his skills to persuade the client to accept a reasonable tax bill to save further stress and professional costs which could well outweigh any reduction in the bill if it continued to be disputed. If the adviser cannot do this, then amended assessments could well be raised and the investigation continues, perhaps ending up at a full contentious Commissioners hearing. Again, some Inspectors reading this article will say that this will not make any difference to them and if the taxpayer fights his corner and loses, this will merely result in a higher penalty at the end.
Some Inspectors will say this, but others whose cupboards are full of working cases will not. They are the Inspectors who know the value of a good working relationship with advisers, and who appreciate it when they receive statements for bank accounts with full analyses or clear calculations of additional profits that can easily be used as a basis for settlement.
Misuse in practice
The latest example that I have seen of what I regard as the misuse of s 20 is a jeweller trading through a limited company. In January this year, before the enquiry window for the directors' personal tax returns had expired, the company received a notice of an enquiry into the company under FA 1998, Sch 18 para 24(1). Business records, information on the business, journal entries, and the directors' loan account were requested. At the end of the letter was the following paragraph:
'The directors' lack of remuneration is a matter of concern and I would like to establish how Mr and Mrs Smith (names changed and Mrs Smith is only the company secretary) managed to survive financially. Please ask them to let me have bank statements/passbooks and credit card statements for all accounts operated by them or in which they have had any interest in the UK or elsewhere in the world in the year ended …'
The accountants who were acting provided the business records in February, but resisted providing private bank statements as the directors were not under enquiry. The Inspector of Taxes responded that the directors' loan account showed only £10,800 drawings and if the bank statements were not supplied, action under s 20 would be taken. The reference to the low level of drawings was incomplete as the directors also had rental income and tax credit.
We were asked to assist with the company enquiry in April and asked for copies of correspondence, tax returns, etc.
We received an immediate reply enclosing the correspondence and saying that, despite our new appointment and the need for time to read through
the correspondence, 'formal proceedings are imminent' with regards to the bank statements. We rang the HMRC Inspector to make representations about private bank statements being requested before records were examined and before a proper and full case had been made for their production and were told in one sentence that the statements were required and s 20 would be used if they were not supplied.
Putting things right
We complained to the line manager in accordance with Code of Practice 1 — Putting Things Right. The reply fully supported the Inspector's working of the case except that we were given more time. Reference to problems with a cashflow test were made, but the test itself was not supplied.
We wrote back to the line manager and asked for full details of the means position and concerns to date, making clear that if there was a case to answer whatever was reasonably required would be supplied without delay and that there was no need for formal action, in particular s 20 with its references to criminality. We received a reply from the Inspector with no mention that the line manager had seen our letter and once again threatening formal action if the information was not received. Eventually, after further representations, we received the full picture on the means position including details of the rental income, and tax credits, and the cashflow test, and were given 14 days to produce the private bank statements. HMRC's letter was dated 12 July 2006. In common with all such post we received the letter four or five days later on 18 July 2006, while we were on holiday. On 26 July 2006, the Inspector issued the s 20 warning letter to the taxpayer and separately to his wife, the letters of course referred to 'criminal offence'. I think I can honestly say that, apart from the very odd occasion, I have never received a full reply to a letter I have sent to HMRC asking for a full response within 14 days.
Included in HMRC's warning letter was a request for the passports of the directors. No request had previously been made for these and certainly no reasons had been given for their production.
Bank statements were submitted in mid-August and we asked for the reason the passports were required; receiving a reply that the Inspector wanted to look at foreign trips in connection with the means position. We accepted that this was a valid reason, but now had to make contact with our clients and explain this to them. Included in the Inspector's reply was a statement that the General Commissioners would be asked to authorise a s 20 notice 'in the week ending 15 September', but no specific date was given.
In line with Code of Practice 1, we complained to the Area Director, by writing to the Inspector, but asking that he forward our letter. In our letter to the Inspector we said that now that we had his explanations, we were arranging for copies of the passports and these would be forwarded to him as soon as possible. We received a faxed reply from the Area Director two days later, on 7 September, which supported the Inspector completely. The short timescale following the Inspector's letter of 12 July 2006 was dismissed on the grounds that the Inspector had no way of knowing we were on holiday!
The justification for the surprise addition of passports to the information for which s 20 action would be taken was 'I believe that (the Inspector) intended to discuss the passports with you during the normal course of the enquiry, but was concerned at the time that any personal information might not be supplied without the need for formal proceedings' whatever that means! I suggest that it means 'we were concerned that you might exercise your right to an explanation which we wanted to ignore and so began the s 20 process regardless'! It is certainly not a reason for tacking passports onto the s 20 warning letter without notice or reason. And of course, the passports provide information well beyond the year under enquiry indeed for up to ten years!
The Director said that s 20 action was due 'within the next seven days', but again no date was given. The date of the hearing for the s 20 application could be the next day or seven days hence! We were in the process of obtaining and copying the passports and had made clear we were doing this and that they would be submitted as soon as possible. If the hearing had been the next day there was nothing we could do about it. It was quite clear that HMRC were not going to give us any reasonable time to produce the information.
We obtained the passports and copied the pages that related to the year under enquiry and sent them to the Inspector by recorded delivery to arrive on 14 September 2006. On that day, the Commissioners signed a s 20 notice and the Inspector wrote to us on 18 September 2006 insisting on sight of the actual passports themselves citing TMA 1970, s 20B(4)(b), which allows the Inspector to see the original documents.
Conflict or co-operation?
At all times we made clear that full cooperation would be given and all we wanted was full explanations so we could, in turn, explain matters to our clients.
Section 20 never used to be appropriate until the taxpayer ceased co-operating or did not respond or delays in providing information were excessive. To provide information without explanations supported by letters from HMRC could expose the adviser to criticism from the client and even in some extreme cases to a claim against their professional indemnity insurance.
Instead of constant threats of s 20 action, sometimes with no explanation at all for the information required, I think that most people would agree that time in an investigation is much better spent on the investigation itself. When we submit statements for private accounts, we normally include an analysis for the convenience of the Inspector to help the investigation progress quickly. Too tight a timescale prevents this being done. If the client believes that HMRC can do what they like when they like it, and without explanation or much notice, then why have someone to represent him?
HMRC's new 'interventions initiative' potentially cuts out the adviser altogether. Wait a minute — are we being slow here? Could it be that HMRC does not want the taxpayer to be represented at all? That they want to come up with figures that suit them and for the taxpayer to simply pay as soon as possible and that's it? I seem to remember an old joke sometimes found in Christmas crackers. Letter from the Revenue: 'How much have you got? Send it!' Have we finally arrived at the tax profession's Orwellian '1984'? The rumbling s 20 steamroller suggests that we may be close. Perhaps we should be making representations to taxpayers' MPs before we find that these unacceptable practices have become normal.
Alexander Byrne is a former Assistant District Inspector and consultant at Hadleys & Co, a firm of Chartered Tax Advisers specialising in tax investigation. He can be contacted on 01926 400055.
TMA 1970, s 20. 'Power to call for documents of taxpayer and others'
Section 20 (1) states that:
'Subject to this section, an inspector may by notice in writing require a person:
(a) to deliver to him such documents as are in the person's possession or power and as (in the Inspector's reasonable opinion) contain, or may contain, information relevant to:
(i) any tax liability to which the person is or may be subject; or
(ii) the amount of any such liability; or
(b) to furnish to him such particulars as the inspector may reasonably require as being relevant to, or to the amount of, any such liability.'
Section 20 (3) requires 'any other person' (i.e. other than the taxpayer) to provide information.
