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KEY POINTS
- An historic look at dealing with enquiries.
- The latest consultation document.
- Explaining the reason for an enquiry.
- The future for meetings; trials and training.
For the whole of my career in the tax business I have been involved, one way or the other, with the tax affairs of small businesses. That has always involved some cases where there was more at stake than a couple of adjustments to this year's computations.
It has always been small business that bore the brunt of this sort of thing, because unlike wage earners or investors, there is no third-party reality check on the figures they return to HMRC.
It is, I suppose, because of that absence of a third-party check that the notion grows that the self employed are less careful about their tax than other people.
Back duty
When I was first in the Revenue (over 35 years ago), there was a thing called 'back duty'. As far as Inspectors were concerned, these were mostly files that you got out now and again and dabbled with; sometimes you even wrote a letter.
You even sometimes got a reply, though usually only after you'd issued two gentlemanly reminders, listed the appeal for hearing by the Commissioners, and accepted one adjournment — a process that might take four months with a following wind.
The normal approach to analysis consisted of a comparison between the declared income of a particular taxpayer and his lifestyle (though I don't think we used that word then).
Such investigations usually started by accident when routine questions began to produce suspicious answers. The pace was decidedly leisurely.
Or sometimes you had a bank slip professing to give you information about something the taxpayer had not declared. Hopefully this related to the right person in the right capacity and possibly whoever typed it out had got it right and put the decimal point in the right place.
Much later I learned that my grandfather, who ran an hotel, had himself been investigated (though after his death) because of a suspicious growth of assets during the war, when the hotel was designated for American and Canadian officers, who actually had money to spend.
According to the family, there was at that time one accountant in the small town, and he had very little idea about back duty work. That was how things worked then.
At the back of all this was what was then called Enquiry Branch (at whose name everybody trembled). You sometimes got a District Inspector who had been in Enquiry Branch and who tended to make a terrible nuisance of himself both to local accountants and his own Inspectors by actually asking difficult questions and even implying that there was dishonesty about.
The 'ARE' system
The system was reformed in the 1970s. From that point on, the accounts that came into the office were scrutinised by a nominated Inspector (District Inspectors having quickly realised that this was one chore they wanted to be shot of).
This usually happened on a Friday afternoon when you got back from the pub, and the various accounts were classified as A (and accepted immediately), E (for enquiry) or R (effectively looking at one or two particular deductions in the accounts).
There was even sometimes something called R+ (usually rather larger cases) and the E and R cases were then doled out among the case workers.
What this meant in practice, was that most of your time as an Inspector was taken up with investigation work rather than writing lengthy and erudite letters.
For those of us who claimed to have joined for the intellectual stimulation of arguing neo-theological points of accounting and tax law this was a great disappointment.
But it is from the 1970s that the current concept of an enquiry really springs.
Although it wasn't compulsory, Inspectors began to ask to see the prime records of the business, and your office gradually filled up with assorted carrier bags. I well remember one Inspector of Taxes whose office was barely habitable while he was dealing with a fish and chip shop which had submitted all its records in plastic fish trays.
But in those days HMRC issued assessments, and if a taxpayer wanted to challenge them he would appeal and submit a set of accounts in support. Most people did that back then, but it usually took a listing for the Commissioners to get the accounts in, and the tax would be stood over all that time.
Self assessment
The 1997 reform of the tax system and the introduction of self assessment changed the rules. From now on it was for taxpayers to say what they had earned or what profits they had made, and for the Inland Revenue as it then was to challenge that self assessment if it thought fit. For the first time, the Taxes Management Act told you what could and what could not be done.
The feature that everyone concentrates on is that the Inspector did not have to tell you why you had been selected, and of course the legislation still does not require that.
But the other feature was the elevation of the examination of the business records to the Holy Grail. That examination was often carried out in complete ignorance of what happened between the raw records and the accounts, and this was to lead to a deal of 'argy-bargy' about working papers.
One thing to remember is that there are at least twice as many small businesses today as there were 25 years ago, and there are not more HMRC staff to deal with them.
HMRC have said that they intend to reform the way they do compliance. It has been standard throughout the meetings of the Compliance Reform Forum that the TMA 1970, s 9A model needs fixing.
It is important in reading this to realise that this is not some new torment dreamed up by HMRC, but what the representatives of the accountancy profession have been asking for.
The new plan
We now have the first fruits of that consultation, in a document headed Openness and Early Dialogue in enquiries (http://snipurl.com/oededoc).
This rather academic sounding title disguises an attempt to ease the pain of the s 9A enquiry. The objective (and you may think it hopelessly starry eyed or you may think it Machiavellian) is to get away from that opening letter which implies that 'we know something about you, but we won't tell you what it is in case you have other sins you want to confess'.
How many times have you as an agent sat down with a client and tried to work out what the problem might be? No more.
The opening letter — or possibly a phone call — will tell you what seems to be the problem and whether it is a full or aspect enquiry. This is openness, and is unreservedly welcome.
Of course, it was standard SCO procedure to tell you, and it appears that analysis has told HMRC that enquiries that speak their name are actually more productive than those which don't.
Having said that, there may be two problem areas. If HMRC open up by telling someone they have been picked at random, that is going to make random enquiries a rather less effective control, and that is the point of random enquiries. The other problem may be cases opened because of a referral from SOCA, where the source of the information has to be protected.
Dialogue and meetings
Early dialogue may be more controversial. This suggests an early meeting with the taxpayer and agent to sort out what the problem seems to be, what needs to be looked at, what the records are like and what the agent has done to transform them into a set of accounts, and how to proceed, with a suggestion that there may be times that all this can be done in one day complete with examination of records and a further discussion of findings (a suggestion that might make sense in small cases, like those in the official 'small business' classification where turnover is below the VAT threshold).
Now we all know that there has been a school of thought that has said 'never let HMRC see your client' and 'never, never go to a meeting with your client', and that this is a message that seems to stick in people's minds when all the other good advice has been forgotten.
It always seemed to me that it was only good advice for those who could not handle an enquiry properly: if you know what you are doing you can make sure that your client comes to no harm.
But at the same time, people have memories of long, long meetings and hundreds of questions. In my days, I had one colleague who was wholly unable to bring a meeting home in less than four hours, and he would be still there, accountant and taxpayer transfixed, as everyone else packed up and went home.
It could be an ordeal, and for the taxpayer who is not properly looked after it will be an ordeal if the meeting is unstructured and has no agenda.
Faster working
In an attempt to break the log jam, just a few years ago there was an idea called Faster Working which introduced the notion of trying to set a schedule for enquiry work. It too was the result of consultation, and a group of us worked away at it and thought we had done good.
And what happened? Nothing. Where agents asked for it, Inspectors said no, and when Inspectors asked for it, accountants said no. It was a new approach introduced without changes in the law, and it required a degree of trust that turned out not to exist.
And that was before the observed decline in relations between the sides that followed the merger and the reorganisation, when you probably still knew, at least by reputation, the officer who was dealing with the case.
Conclusion
Has anything changed? Yes, much has changed, and some of it not for the better.
But there is one big difference this time, and that is that HMRC, encouraged by what looks like progress brought about by a more open approach in the large business sector, are going to put their weight behind this initiative, and it is going to be rolled out on a trial basis very soon.
Inspectors will be trained to take this new approach, and it is even possible that agents will be invited to join in this training.
There is no doubt at all that we need to be doing something different. We hope (and HMRC believe) that the selection of enquiry cases will be much improved by better risk assessment, and certainly there will either be fewer enquiries or they will be much shorter.
If this initiative fails then I fear things will get worse instead of better.
Simon Sweetman is a self-employed tax consultant, and can be contacted on 01394 274857 or simon.sweetman@btinternet.com
