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KEY POINTS:
- Intervention letters issued last year were widely criticised.
- The Compliance Reform Forum was meant to be consulted on new interventions.
- New road haulier letter has repeated many of the errors in the previous letters.
Intervention letters have dropped off most people's radar during this year, though they were a major issue twelve months ago. Just to remind you, they were intended to be a way of asking questions of taxpayers that fell short of a full enquiry.
For example, if HMRC felt that certain trades were typically making the same errors, they would issue an intervention letter to such traders asking them to check and confirm that they were not making those particular mistakes. Whilst the principle of interventions was cautiously welcomed in the initial discussions that HMRC had with the profession, there were some serious concerns about the protection for taxpayers. In particular, it was hard to see why taxpayers should co-operate with an intervention which did not give the same finality as an enquiry.
Unwelcome pilot
It therefore came as a very unwelcome surprise to the profession to find that HMRC intended to start issuing intervention letters, and making phone calls, in a pilot study from July 2006. The professional bodies complained that they had not had time to consider the letters properly and make representations, that the problems it might cause for professional fee insurance and indemnity insurance had not been considered (see the roundtable report in this issue) and that they needed time to brief their members on how to react. HMRC ignored this, and pressed ahead with the pilot regardless.
The period when the intervention letters were being sent out was probably the one where relationships between profession and HMRC had reached their lowest point.
The original intention was to run a second pilot following the first. Given the number of complaints about the way the interventions had been introduced, this was scrapped. Instead, the evaluation of the pilot issued in April this year said that many lessons had been learned from the pilot.
Of these: 'perhaps the key lesson learned was that timely and fuller engagement with external stakeholders improves the design, development and delivery of new compliance interventions'.
So intervention letters are to continue, but only after there has been consultation through the Compliance Reform Forum. And indeed we know that there was consultation on one particular type of letter, which is intended to ensure that landlords calculate their income correctly. HMRC seemed to be determined not to make the same mistakes again, and this has been part of the steady improvement in relationships with the profession over past months.
Road hauliers
It was therefore a surprise to hear talk of an intervention letter being sent to road hauliers. From my enquiries, this does not seem to have gone to the Compliance Reform Forum, nor has any announcement been made that it was going to be issued. I always found it hard to distinguish between some of the supposedly different types of intervention letter, but this appears to be in the format of either a short risk review or a self-audit. The letter starts by saying that three errors have been identified as the most common mistakes made by businesses in the trade sector.
These are:
- incorrect VAT treatment of purchases and disposals of vehicles;
- reclaiming VAT on fuel purchased in the EC; and
- not accounting for VAT on other trade activities such as hire of trailers, repairs to vehicles etc.
Dangerous assertions
Now there is nothing wrong with highlighting those particular items for review, and the explanations given are concise and straightforward. However, the letter repeats one of the main mistakes of the piloted interventions by then referring the taxpayer to reams of other guidance, and doing so inconsistently. A leaflet is enclosed on the VAT treatment of various forms of asset finance, but the guidance on second-hand vehicle disposals and fuel purchased in the EC is given by a reference to two public notices which are not enclosed, and no full reference on the HMRC website is given.
Far worse, however, is the declaration that the taxpayer is asked to sign and return to confirm either that the records are correct, or that any mistakes have been rectified. The letter says nothing about the period for which the records should be reviewed. The first question on the declaration simply asks 'Have you reviewed your VAT records?'. It is only when you get to the declaration at the end where you find the date from which the review should start — 1 June 2004 in the example I have seen, presumably generally set at three years.
But there is worse to come. When asking which areas the error relates to, the three issues raised in the letter are specified, and then there is a fourth heading of 'other'. The declaration asks the taxpayer to confirm that, to his reasonable knowledge, there are no errors other than those declared. So this is not a confirmation that you have checked just for the three particular errors and found none, it is a confirmation that you have checked your VAT records in every respect, with no explanation of the dangers of making such an assertion.
Breach of trust
According to the HMRC press office, this letter is part of a national initiative that started in May 2007 and 3,500 letters have been sent out. Crucially, it is not considered to be part of any new initiative, and hence has not gone to the Compliance Reform Forum, because it is apparently a type of letter that has been used for some time in HMRC work, particularly in VAT compliance. That suggests there may be other similar letters being issued in other trades; if so, Taxation would like to see examples.
I have spent several hours over the past few months hearing repeated assertions from senior HMRC officials at conferences and seminars about the need for trust, openness and transparency. When the proposed landlords' letter, referred to above, was written up sensationally in the press, I supported HMRC's view that they were doing what they had been asked to do by consulting with the profession.
Discovering that, throughout this period, HMRC have been sending out a letter which repeats many of the mistakes of the initial pilot and has not bothered to take it to the compliance forum on the grounds that it is just 'business as usual', makes me wonder why we all bother.
If HMRC are serious about trust, openness and transparency, they should issue immediate instructions to all offices to halt this type of intervention letter until the Compliance Reform Forum has agreed the form that such letters should take, and the safeguards that are necessary for taxpayers. If they don't, we can all draw our own conclusions about the level of even-handedness with which HMRC are approaching these issues.
