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KEY POINTS
- Are HMRC's new powers so different from their old ones?
- Conditions must be satisfied before HMRC can issue a taxpayer notice.
- A reason to suspect does not allow HMRC to make speculative enquiries.
- The definition of business premises has been restricted.
- The nature of different types of checks.
There is high anxiety in the tax advice community about the changes to HMRC's powers to obtain information and make visits, as contained in Finance Act 2008, Sch 36. Why, I wondered?
Is anyone actually looking at this from the point of view not of what HMRC did yesterday, but what they might do tomorrow? Are we in fact putting together what we didn't like yesterday with what we won't like tomorrow without regard to today?
From 1 April 2009 (probably) most of the existing powers will disappear; for example TMA 1970, s 20 will no longer exist. Both HMRC and agents have to learn to live with the new ones.
It will be apparent to most specialists at the lower end of the market (who are not necessarily the people whose voices you hear when people talk about HMRC) that the number of s 9A enquiries has fallen off dramatically in recent years.
This is not an accident, it is deliberate policy after HMRC finally accepted that the return from small business enquiry work was simply not worth the effort.
If you do not know this has happened and you do not know why, then you will not be able to talk sensibly about the new powers. But it is doubtful whether some of the people expressing the loudest anxieties have thought this through.
I write this article from the point of view of a direct tax specialist. The article deals with the changes in the law for direct tax, and especially with the changes that will regulate everyday behaviour, rather than some of the more exotic provisions.
The expectation is that these changes will be introduced from 1 April 2009, although the date is still to be set by the Treasury. For most purposes we are looking at two sets of powers: the power to request information or documents and the power to visit premises.
Much discussed
The changes have been consulted on. Since the merger there have been long deliberations by the Powers, Deterrents and Safeguards Review Committee. This committee has met regularly and its minutes, up until March this year, are available on the HMRC website.
Following those deliberations and other consultations (with the Compliance Reform Forum for instance) we got, among other things, the concession about the enquiry window (a concession some people regard as meaningless, apparently on the basis that if it mattered HMRC would not have changed it).
But we now have FA 2008, Sch 36. HMRC have now also published draft guidance for comment. That guidance so far is mostly a straightforward reading of the Act, and adds nothing sensational: the difficult parts have not yet been written.
What can HMRC do that they don't do now? The first new power is to issue a taxpayer notice.
Taxpayer notices
Schedule 36 para 1 states:
'An officer of Revenue and Customs may by notice in writing require a person ("the taxpayer") –
(a) to provide information, or
(b) to produce a document,
if the information or document is reasonably required by the officer for the purpose of checking the taxpayer's tax position.'
That power is fettered. Where the person has made a return of their income for that period, para 21(1) says 'a taxpayer notice may not be given for the purpose of checking that person's income tax position or capital gains tax position in relation to the chargeable period'.
If that person has not made a return, the allowable period for HMRC to make a determination has been reduced from five years to three (amendment to TMA 1970, s 28C(5)).
There are exceptions, of course. The first is where an enquiry is in progress, which is hardly controversial. The second begins to amend the 'discovery' process. It has to be said that this was in substantial need of amendment since various court decisions have left it complicated and messy.
How does this work? Sch 36 para 21(6) states:
'Condition B is that an officer of Revenue and Customs has reason to suspect that –
(a) an amount that ought to have been assessed to relevant tax for the chargeable period may not have been assessed,
(b) an assessment to relevant tax for the chargeable period may be or have become insufficient, or
(c) relief from relevant tax given for the chargeable period may be or have become excessive.'
This is the new phrasing of what was called discovery. Note that either the taxpayer must consent or that the officer has to go to the first tier tribunal for approval, and will need to convince them that he has 'reason to suspect'.
If the taxpayer does not consent, he may appeal, unless the tribunal has already approved the notice. This therefore allows the officer to issue a notice requiring the production of information or documents where he or she has reason to suspect that something may be wrong.
Reason to suspect
So where the taxpayer has made a return, and that will be most cases that an agent sees, there can be no taxpayer notice unless there is an enquiry already or there is reason to suspect that something is wrong.
'Reason to suspect' means that there are facts which suggest that tax may have been under-assessed or underpaid, or that excessive tax relief may have been claimed or given.
Having a reason to suspect that tax may have been under-assessed does not provide enough information to make an assessment. The information power potentially enables HMRC to decide what assessment must be made.
On the other hand, reason to suspect does not allow speculative enquiries, seeking information merely in the hope that something relevant will crop up. There must be evidence of an actual risk.
There seems to be a suggestion in HMRC's draft guidance that this legislation will apply to random checks. It is hard to see how this can work in such cases (what information would you ask for?), when opening an enquiry in the window seems a more rational approach. Since the information powers require a reason to suspect, taxpayer notices cannot surely be used randomly.
The random enquiry programme will still be used as it is now, although it is hard to see how it fits with 'openness and early dialogue', which it is to be hoped will become standard practice where there are full enquiries.
There is no requirement here that the return is wrong because of the taxpayer's default. Nor, I think, is it a defence to say that the information has already been supplied.
However, once the officer has the information, and assuming the enquiry window is closed, he is going nowhere unless he can demonstrate that the error 'was brought about carelessly or deliberately' by the taxpayer; those words replacing 'is attributable to fraudulent or negligent conduct' in TMA 1970, s 29(4).
He still needs to meet the s 29 criteria to raise an assessment. He may be able to seek information which will give him the grounds for an assessment, but he cannot do that unless he has initial reason to suspect that something is wrong.
So unless the taxpayer is happy to oblige him, that means a trip to the tribunal with his reasons. That is not something HMRC will do every day.
Most of the opposition to these proposals seems to come from people who have seen their local Inspectors picking on taxpayers and running roughshod over them.
But HMRC are not like that any more: the future compliance strategy of HMRC are going to be much more based on information provided by UK and foreign banks, from property records, from information from other tax authorities, and so on.
That information is increasing by the moment and will increase further. There are strong calls in the wake of the present unpleasantness for an ending to tax havens. Local HMRC officers no longer choose what and where they will investigate. It has made them unhappy, and traditionalists in the department do not like it, but that is the way it is.
Visits
This takes us to the second leg of Sch 36 and the question of visits to business premises. Remember that we have been living with a situation in which the HMRC officer could turn up to look at employer compliance, but if he thought he had spotted something that would interest his Inspector colleagues, he might have passed it on.
Paragraph 10(1) states:
'An officer of Revenue and Customs may enter a person's business premises and inspect –
(a) the premises,
(b) business assets that are on the premises, and
(c) business documents that are on the premises,
if the inspection is reasonably required for the purpose of checking that person's tax position.'
He may not enter or inspect any part of the premises that is used solely as a dwelling (although if, like me, your office is upstairs in your home, how does he get there?).
There have been several changes here since the Finance Bill. The original Bill provided power of entry and inspection to premises in connection with the tax liability of any person, not just the business person.
The restriction for premises used solely as a dwelling was added, and 'business premises' were redefined.
Paragraph 10(3) now says:
'"business premises", in relation to a person, means premises (or any part of premises) that an officer of Revenue and Customs has reason to believe are (or is) used in connection with the carrying on of a business by or on behalf of the person."
It originally said:
'“business premises" means premises (or any part of premises) that an officer of Revenue and Customs has reason to believe are (or is) used in connection with the carrying on of a business.'
Paragraph 58 defines premises as including:
'(a) any building or structure,
(b) any land, and
(c) any means of transport.'
It originally said nothing to define premises at all. It seems a bit odd to describe a bicycle as premises, to say the least, but this appears to mean that if you lock your business records in the boot of your car, the HMRC officer can still look at them.
The Act says that a means of transport might be used as business premises, with obvious examples being mobile fish and chip vans and market stalls run from vans. But beyond that it will be possible, for instance, for an officer to ask you to open the car boot if he believes seeing its contents may assist the check being carried out.
What are the limits on this inspection power? Schedule 36 para 12 says:
'(1) An inspection under this Part of this Schedule may be carried out only –
(a) at a time agreed to by the occupier of the premises, or
(b) if sub-paragraph (2) is satisfied, at any reasonable time.
'(2) This sub-paragraph is satisfied if –
(a) the occupier of the premises has been given at least seven days' notice of the time of the inspection (whether in writing or otherwise), or
(b) the inspection is carried out by, or with the agreement of, an authorised officer of Revenue and Customs.
'(3) An officer of Revenue and Customs seeking to carry out an inspection under sub-paragraph (2)(b) must provide a notice in writing as follows –
(a) if the occupier of the premises is present at the time the inspection is to begin, the notice must be provided to the occupier,
(b) if the occupier of the premises is not present but a person who appears to the officer to be in charge of the premises is present, the notice must be provided to that person, and
(c) in any other case, the notice must be left in a prominent place on the premises.'
So the officer now has a right to enter your premises giving you seven days notice (again, a change from the Bill, which would have allowed 24 hours). The question is when and why this might actually happen. One obvious example might be to have a meeting on the business premises, an offer which it will now be difficult to refuse.
In practical terms, the current situation is that officers routinely visit business premises for the purposes of PAYE and VAT because they are empowered to do so. They will continue to do that, but the visits will be carried out by staff trained to be 'tax general practitioners' who will be able to look at other business records as well and will have the right to do so.
It seems highly unlikely that HMRC can or would want to spare staff to visit small businesses just to look at their accounting records: this would be staggeringly unproductive. Furthermore, given the loose definition of 'statutory records', such visits are likely to be inconclusive, although they could be used for follow ups for instance, in suspended penalty cases.
Checks
The question of the use of telephone calls will need teasing out. Under the existing rules there was always uncertainty about whether and when HMRC could contact taxpayers directly, with the original view being that the answer was just about never; instead they had the nuclear option of the s 9A enquiry.
This led to a lot of uncertainty about interventions and whether HMRC staff were overreaching. It is sensible for HMRC staff to call taxpayers to check straightforward matters.
However, if an agent is acting, the call should be to the agent and, in any case, the subject matter should not be expected to drift beyond the simple piece of information.
It appears, however, that guidance notes are still being written to explain to HMRC staff the difference between a correction to a return, where a telephone call would be acceptable, but the matter can really go no further, and a compliance check, where there must be the issue of a taxpayer notice in writing before anything else can happen.
Information and inspection powers can be used at any time provided that the information or inspection is reasonably required for the purpose of checking a tax position. That cannot be done, remember, where a return has been made, but there remains the possibility of a correction.
A check is not — and cannot be — a challenge to the return.
Do not overreact!
We will all have to get used to the new powers, and we have to wait for the consultative committee to return to the question of safeguards. But I think it is important that we do not overreact to what, in my view, is more a reconstruction than an extension of HMRC powers.
Simon Sweetman is a self-employed tax consultant, and can be contacted on 01394 274857 or simon.sweetman@btinternet.com.
