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KEY POINTS
- HMRC's new information powers cover a wide remit.
- New powers may be used for pre and post-return checks.
- Inspectors may be able make unannounced visits to business premises.
- Will innocent taxpayers find they are wrongly targeted?
- How impartial can an HMRC review panel be?
Albert Einstein once said 'your imagination is your preview of life's coming attractions'. Similarly, it seems that HMRC consultation documents are your preview of coming attractions in tax. It therefore pays to at least be aware of such consultations.
The consultation documents which have attracted publicity recently include those on income shifting and, thanks to Robert Maas's article Disaster in the making, on payrolling benefits in kind and expense payments.
On the face of it, another consultation document, 'A new approach to compliance checks', may not seem particularly inspiring, controversial or worthy of much attention. In any event, HMRC have indicated that the compliance checks legislation will not be introduced before April 2009.
However, the document includes one or two proposals which may be a surprise to some, and even a cause for concern.
Part of a series
The compliance checks document is part of a series of consultations under the broad banner 'Modernising powers, deterrents and safeguards', which also covers penalties for incorrect returns, tax payments and the collection of tax debt.
The document on compliance checks covers record keeping and information and inspection powers in relation to income tax, capital gains tax, corporation tax and VAT, and will be extended to include PAYE and National Insurance contributions.
Interestingly, the proposals include powers to shorten the time period for which records must be retained for tax purposes. This is intended to align direct taxes with existing VAT procedures.
Penalties for failing to keep records required by statute would be capable of being suspended, in line with the penalty regime for errors in FA 2007.
New information powers
The proposed powers of information and inspection also make for interesting reading. The legislation covering information powers will eventually regulate HMRC's activities in respect of tax return enquiry work for individuals and companies, VAT and PAYE inspections and National Insurance visits.
In fact, HMRC state that the provisions will cover everything from 'assistance and education' to full scale civil tax investigations (although why they need such powers merely to assist and educate is not altogether clear), and will replace the existing powers, e.g. TMA 1970, ss 19A to 20 for income tax and capital gains purposes, and VATA 1994, Sch 11 para 7 for VAT purposes.
A fixed and daily penalty regime is likely for non-compliance with information powers, and additional penalties are under consideration in cases where taxpayers may benefit more by paying a normal penalty than providing information.
HMRC also want to extend the new information powers so that they can be exercised on a 'pre-return' basis for income tax, capital gains tax and corporation tax purposes. Their justification for pre-turn checks of business taxpayers is that there may be '… issues that could most usefully be tackled before a return was due'.
But how will they know that there are 'issues' before the return has even been submitted? This power could presumably be used to target particular trades or industries, where for example general practices or specific deductions are in dispute and has the ring of the ill-fated 'interventions' about it.
In addition, HMRC propose post-return checks to facilitate reviews of periods for which returns had been submitted during a tax return enquiry (or VAT or PAYE compliance check), or 'relating to a discovery'.
It would not surprise me if detailed inspections of business records are conducted on a more regular basis than ever before if these proposals are enacted. One can only hope that HMRC officers will use their powers sensibly and proportionately.
HMRC would like to check the tax position of those who have not been issued with a tax return. This seems like a reasonable and necessary way to confirm whether a return is in fact required.
However, HMRC would also like the power to require taxpayers to produce non-business records, whether a return was issued or not. This would be a new power in relation to income tax and capital gains tax, with no right of appeal as it relates to statutory records which must be kept by law.
But would this provide HMRC officers with an alternative means of checking the non-business records, e.g. private bank statements, of the self-employed and company owners?
One would expect not, and the consultation document does include separate draft codes of practice for business and non-business taxpayers.
There is also a proposed HMRC power to see a taxpayer's non-statutory records, such as appointment diaries, board meeting notes, correspondence, schedules and even photographs.
In addition to pre-existing documents, the taxpayer could be required to create a document for HMRC, such as an annotated schedule.
HMRC state: 'The information would have to be potentially relevant to establishing a tax position and the request would have to be reasonable'.
I do have concerns about the reasonableness aspect here. What is 'reasonable' to, say, an enthusiastic, newly-trained HMRC officer in an enquiry may differ from the view taken by the taxpayer or an agent.
There is a right of appeal against such information notices, and I suspect that this information power may be the subject of a number of such appeals.
Inspection of premises and assets
Probably the most controversial part of HMRC's proposed information powers is the power to inspect business premises and assets, which currently has no basis for income tax, capital gains tax or corporation tax purposes.
The inspection must be reasonably required in order to check a person's tax position. Expressions such as 'reasonably required' cannot be precisely defined, and will inevitably be the cause of friction between taxpayers and HMRC.
HMRC's justification for inspection powers is that '…the ability to see the business can give the officer a better commercial perspective and a more complete picture of the records, assets and business activities.
'This can reduce the time taken and avoid the asking of what turn out to be unnecessary questions. The ability of fiscal authorities to see business records, assets and premises is the norm throughout OECD countries. Of 30 countries surveyed, 25 provide access to business premises.'
Yes, but…
There would be no right of appeal against this inspection power. The rationale appears to be that the inspection would relate to business information which HMRC already have a statutory right to see.
Yes, but what about the right of appeal against the timing of inspections?
HMRC state: 'Any legislation should specify that the time and date of the visit should be convenient to the taxpayer'.
But let us suppose that an HMRC officer contacts the client and requests access to the business premises. The client agrees a date and time, but an unexpected emergency makes the visit inconvenient.
The client contacts the HMRC officer who (one would hope) readily agrees an alternative date and time.
Unfortunately, further unforeseen circumstances mean that the client wishes to postpone the visit again. What if the HMRC officer does not wish to postpone on subsequent occasions?
There is no right of appeal against the inspection, so what happens next?
The client could refuse the HMRC officer access to the business premises. A penalty may then be imposed for non-compliance, which the client could appeal. It is to be hoped that common sense would prevail, and the situation would not be allowed to escalate to this extent.
However, in practice, enquiries can become adversarial, and a sense of proportion can be lost.
A draft code of practice for businesses deals with visits to business premises. Such visits would usually, but not always, be pre-arranged.
The draft legislation provides that at least 24 hours' notice should generally be given, in writing or otherwise. Presumably 'or otherwise' provides for HMRC officers to give notice by telephone.
HMRC state: 'A longer period might have been suitable but taxpayers often want the inspection completed quickly, for example to verify a VAT repayment return'.
It is a slight stretch of credibility to suggest that a 24-hour notice period is an altruistic proposal for the taxpayer's benefit. I do not expect that most clients will agree.
However, the draft code of practice indicates that HMRC will normally give at least ten days' notice of a visit. Unfortunately, professional advisers will not be notified of visits unless the client has specifically asked HMRC to do so.
This could be important, because HMRC intend asking 'brief questions' about the nature of the business, and can also copy or even 'borrow' some or all of the business records.
Just dropping in
HMRC state that in 'exceptional' cases they need to call at business premises without prior arrangement, such as to prevent concealment by the taxpayer in advance of a pre-arranged inspection, in cases where there was evidence of deliberate understatement of tax or overstatement of repayments.
The consultation document indicates that the decision whether to visit business premises without prior arrangement will be risk based. HMRC officers would be required to obtain internal authorisation for such visits at a 'senior level', and their conduct would be subject to a code of practice.
The draft code states that possible reasons for visits without prior arrangement include cases where information provided on an official form, e.g. VAT1, does not match other information held by HMRC.
The type of 'information' that would trigger an unannounced inspection is not stated, but presumably will be of sufficient quality and veracity to justify such action.
HMRC have apparently ruled out external authorisation as being too costly and potentially overloading the judicial system or new tribunals. As mentioned, there is no right of appeal against inspections.
The taxpayer could refuse entry, or ask HMRC to leave during an inspection. However, this would not prevent HMRC from calling again, and a penalty could also be imposed.
However, HMRC are considering a 'reasonable excuse' exception for taxpayers refusing access without advance warning, such as important prior arrangements, serious illness or family responsibilities.
The consultation document refers to responses to a previous consultation on this subject, one of which suggested that there should be a rigorous post-visit appeal process, to allow for the award of compensation to the taxpayer and a block on HMRC using information gathered during the visit.
While this would provide a useful deterrent against unmerited visits or inappropriate use of these inspection powers by HMRC officers, in some cases the effect on businesses may not be so easy to rectify. Still, at least some form of restitution is better than none at all.
In the consultation document, HMRC cite examples where they consider that it may be appropriate to carry out visits without prior arrangement. One such example is in respect of businesses which use electronic cash registers.
The example states: 'Some electronic cash registers can be reprogrammed in ways that result in under-recording of sales. A programme of risk-targeted visits without prior arrangement to check cash registers has found widespread irregularities.
It is likely that if the visits had been arranged in advance the registers would have been set to “normal”.'
This example worries me, as I wonder how many cash-based businesses will be at risk of unannounced inspections. In addition, the HMRC visits would be in business hours, presumably so that guilty business owners could potentially be caught in the act.
However, this would leave innocent traders with some explaining to do to any customers who happened to witness the inspection.
For inspections at private residences, HMRC would need the taxpayer's consent to visit premises which are not used for business purposes, except in criminal investigation cases where a warrant has been obtained.
However, what if the residence is used for business purposes as well?
Visits by HMRC officers could still take place, subject to an internal authorisation process and a code of practice, and the proposed legislation would only allow HMRC access to parts of business premises used for business purposes.
But how this would work in practice for rooms with mixed business and private use remains to be seen.
Practical issues
In principle, I have no problem with the concept of HMRC officers visiting business premises. Nor am I particularly concerned that visits could take place unannounced in exceptional circumstances, provided that:
- they are genuinely exceptional;
- HMRC officers are required to obtain authorisation at a sufficiently senior level; and
- the conduct of visits is properly regulated.
Where I do have a problem is in the vast majority of non-exceptional cases where an HMRC officer could, in theory, at least, pick up the phone, call a taxpayer and announce that he is popping round the next day, and possibly without the agent's knowledge.
I am also somewhat concerned that inspections by HMRC officers are to be policed internally rather than externally. How confident would most taxpayers and agents be of a fair and impartial review?
A taxpayer making a complaint against an HMRC officer to an internal HMRC review panel seems to me rather like a Manchester United supporter refereeing a football match between United and City.
For aggrieved taxpayers, the perception of impartiality is just as important as a fair hearing.
My concerns are not so much about the powers themselves, but the degree of discretion exercisable by HMRC officers, and how those powers will be used in the real world.
Codes of practice are all well and good, but only if HMRC officers adhere to them and taxpayers are fully aware of their rights. One hopes that there will be rigorous policing of the powers, rather than HMRC simply reacting to complaints.
HMRC state that the compliance checks legislation would take effect by Treasury order, which could happen at any time rather than on the passing of a Finance Act, although as mentioned, the final provisions will not be introduced until April 2009 at the earliest.
The present round of consultation ends on 6 March 2008, but I hope that there will be at least one further opportunity to review and comment on the draft powers before they become law, as they are clearly important.
Mark McLaughlin CTA (Fellow), ATT, TEP is a tax consultant, general editor of TaxationWeb and contributing editor of Tottel's Tax Compliance Manual. The views expressed are his own.
