Meeting Points

JOHN T NEWTH FCA, FTII, FIIT, ATT reviews the recent Butterworths Tolley Practical Tax Investigations Conference.

Sessions were chaired by Andrew Watt of WJB Chiltern. His colleagues, David Pert and Phil Berwick, were among the speakers. Other speakers were Nichola Ross-Martin, tax consultant of Tunbridge Wells, Jim Yuill of Ernst & Young, David Jordan, independent VAT specialist, John Gwyer, director of tax investigations at PKF, and Gary Gardner of Deloitte & Touche.

Special Compliance Office

In the past, a benchmark for Hansard cases has been a tax loss to the Revenue (excluding interest and penalties) in excess of £100,000 and/or falsification of documents, collusion or conspiracies suspected or a professional advisor was suspected of involvement.

It now appears that large district enquiries which do not necessarily meet this criteria are being referred to Special Compliance Office and that in effect personnel at that office are 'digging around for cases'.

It should be noted that a Hansard meeting could last for four to eight hours and could be spread over more than one day.

Verbal responses are required at the meeting at which the client must be present. Written denials before the meeting are fatal.

Meetings should never be at the business premises or the private house of a director. This is not a lack of co-operation.

The meeting should be the only opportunity for the Revenue to meet the client. The subsequent report and settlement negotiations should all be dealt with by the professional adviser.

The timescale for the report should be realistic. Do not be browbeaten into agreeing six months. A year or eighteen months is likely to be more realistic.

Pre-appeal negotiations

• Keep written transcripts of all communications, with times and dates.
• Agree the list of contentious points or outstanding items (if any) with the Inspector.
• Consider whether earlier years are subject to enquiry.
• Consider the options on a cost versus benefits approach. Double-check your arguments.

Bank mandates

Clients should never sign 'to whom it may concern' mandates produced by the Inland Revenue and great care should be exercised regarding bank mandates generally.

The prosecution case of Commissioners of Inland Revenue v Cleall (noted in Butterworths Investigations Service at paragraph 7.122) is instructive as the bank answered an Inland Revenue letter without the authority of the client. However, Mr and Mrs Cleall, an elderly couple, had already signed a Hansard document and this did not include the offshore bank account which came to light following the bank's reply to the Inland Revenue letter. Mr Cleall subsequently received a custodial sentence.

Other Special Compliance Offices

Insolvency Unit

This is in addition to the London Special Compliance Office structure and illustrates the determination of the Revenue to investigate a substantially greater number of cases where a company has gone into liquidation and the only major creditors are the Revenue and/or Customs and Excise.

London Liaison Group

This group is responsible principally for information gathering. It will interview taxpayers who are not necessarily subject to investigation themselves in an effort to obtain information which may lead to or be part of a Special Compliance Office enquiry. The group is also responsible for exchanging information with other fiscal authorities under double taxation agreements.

Manchester Expatriate Unit

This Unit is attached to the avoidance group at Special Compliance Office in Manchester. It has a nation-wide remit to assist network offices with their larger and more complex expatriate cases.

Matters for investigation

Matters likely to attract investigation by the National Insurance Contributions Agency are termination payments, share schemes, personal incidental expenses, aggregation of earnings, staff entertaining, status, home to work expenses, and long service awards.

Class 1A contributions

Where there is mixed business and private use of a benefit, Class 1A liabilities will arise on the full benefit unless a claim under section 198, Taxes Act 1988 is allowable on the whole benefit. For instance, if a director is on a business trip which involves three nights accommodation at an hotel but then he extends his trip by two days for private purposes at the same hotel, then the whole expense will be subject to Class 1A contributions.

VAT searches

There is nothing in the VAT legislation which gives Customs and Excise the power to search without first having a warrant issued by a Justice of the Peace, having been satisfied on oath that there is reasonable ground for suspecting a fraud offence of a serious nature. A fraud offence here means one of a criminal nature (section 72, Value Added Tax Act 1994) and not a section 60 offence which is the civil penalty for VAT evasion.

VAT penalty mitigation

Full co-operation can, in theory, mitigate a penalty from 100 per cent of the VAT involved to nil, but it is more likely to be 25 per cent minimum penalty where dishonesty has been involved. This must be seen as a good deal for the taxpayer as a misdeclaration through simple error would receive a 15 per cent penalty if the limits are breached.

Books and records

The VAT legislation does not set out what books and records a business has to keep. With cash businesses, essentially all that is required is a record of daily gross takings. There are, of course, other requirements if the taxpayer uses a particular retail scheme, for example keeping proper tax invoices as evidence of the right to recover input tax.

Class 1B contributions

Class 1B liabilities were introduced from April 1999 to link in with pay-as-you-earn settlement agreements.

The first Class 1B contributions were due in October 2000 for the 1999-2000 tax year. For that year, Class 1A contributions only arose on cars and fuel. Many employers have apparently paid Class 1B on all items within the pay-as-you-earn settlement agreement and so significant refunds may be due.

Section 20BA, Taxes Management Act 1970

The new orders for the delivery of documents were introduced by Finance Act 2000. They are for use only by Special Compliance Office, and not by local tax offices. Code of Practice 22 has been introduced. Some of the other relevant points are:

• Application is made by the Revenue to an appropriate judicial authority, such as a circuit judge in England and Wales, a Sheriff in Scotland, or a County Court judge in Northern Ireland.
• There must be reasonable grounds for suspecting serious fraud.
• Documents are (or may be) in the possession of the taxpayer concerned.

Criminal Justice Act

Section 50, Criminal Justice and Police Act 2001 provides for additional powers of seizure from premises. It appears to meet the situation where it cannot be established on the premises whether material (including computer records) is seizable or non-seizable. In such circumstances, the 'whole' item can be removed. In practical terms this mandate is likely to be invoked during a Revenue search/raid where:

• The volume of the material is too great to allow proper examination on the premises.
• Seizable material and privileged non-seizable material is held on a computer hard drive.

Self assessment enquiries

Under section 19A, Taxes Management Act 1970, any 'officer of the board' (not therefore just Inspectors) may issue a notice requiring the production of documents and accounts or other particulars in connection with an enquiry into a self-assessment return.

The notice may be issued at the same time as the notice of enquiry into the return, or may be issued subsequently. If the notice is issued at the same time as the notice of enquiry, the case will be an exceptional one in the view of the tax office, as internal authority for this procedure has to be obtained first.

When a section 19A notice is issued, the points to check are as follows:

(1) Is the Inspector acting reasonably in his request for information?

(2) Is the information requested relevant to the taxpayer's return?

(3) Is the information reasonably required for this investigation?

(4) In the case of documents, are they in the possession or power of the taxpayer?

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