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KEY POINTS
- HMRC appear to think no further safeguards are necessary to protect taxpayers.
- Some HMRC officers are using existing powers inappropriately.
- Advisers must be aware of what is and is not permitted during an HMRC visit to business premises.
- HMRC bosses must guarantee their officers will act reasonably.
Much has been written in recent months about the expansion of HMRC's powers (many of which are contained within FA 2008, Sch 36).
Despite some comments to the contrary, I have no doubt that for the main direct taxes, HMRC powers have increased and safeguards have been reduced.
Here are a few examples, although it is by no means a comprehensive list:
- rights of appeal against information notices are reduced;
- pre-authorisation by the Commissioners is not necessarily needed in the future (unlike TMA 1970, s 20);
- information as well as documents can be demanded;
- visits can be made to business premises at seven days notice or, sometimes, no notice with little prior approval;
- enquiry powers are not restricted to a particular tax year but are available to check a person's tax position in relation to past, present or future liabilities;
- there are powers to dictate what records should be kept; and
- a new power to search for a discovery.
Some recent commentary has focussed on the lack of safeguards written into primary legislation and the fact that HMRC's actions and taxpayer protection will instead be covered only by internal guidance.
In recent months there have been several assurances from senior personnel within HMRC that the new powers will be exercised reasonably and that guidance is not a poor substitute for legislation. The clear message from HMRC is that legislation to protect taxpayers is not necessary as officers will follow non-statutory guidance properly and not act unreasonably.
Francesca Lagerberg noted in her article Getting back into balance that guidance alone is not enough. If legislation is not an option to provide taxpayer safeguards, tax advisers and their clients must be absolutely convinced that HMRC officers will not use the very widely drawn powers in an arbitrary or unreasonable way. At present I am not convinced of this.
Currently, we are not totally dependent on individual officers taking a reasonable approach in line with non statutory guidelines, but in the future we may be.
Worryingly, there is an increasing number of instances of totally inappropriate actions with officers straying far beyond the boundaries of legislation in ways that are clearly not isolated errors. Of the many examples I have come across, the following are perhaps the most blatant.
Inappropriate use
In my article Turning up the heat I gave some examples of how the discovery provisions at TMA 1970, s 29 were being inappropriately used as part of the follow up to last year's offshore disclosure facility (ODF). Recently we have seen numerous examples of the inappropriate use of s 29 on matters that are nothing whatever to do with the ODF.
I have seen several letters from HMRC (and heard of several more) purporting to open an enquiry under s 29. The gist of the letters is that, although the years in question are closed and HMRC are too late to open a self-assessment enquiry, an enquiry is nonetheless being made under the discovery powers.
Many of the letters enclosed Code of Practice 11 (which covers self-assessment enquiries into tax returns) and included wording such as 'I therefore intend to undertake an investigation… under s 29 of the Taxes Management Act 1970'.
The letters included requests for various information and documents along precisely the same lines as a normal self assessment enquiry. There was little or no indication that HMRC actually have no power to open such enquiries or make such demands.
It must be remembered that s 29 is an assessing power, i.e. it is a power to raise an assessment once a tax irregularity has been discovered; it does not include any enquiry powers.
The question is, if HMRC officers are regularly using existing legislation inappropriately, is it credible to suggest that the same thing will not eventually happen when the new powers are implemented? The way the new rules are drafted means they are capable of very broad, subjective interpretation and, potentially, abuse.
Visits to business premises
At present, broadly speaking, only VAT and employment taxes officers can visit business premises. That will change when FA 2008, Sch 36 comes into play, enabling visits to be made relating to all the main taxes.
Although the new rules are not yet active, I have recently seen instances of corporation tax inspectors seeking to visit business premises on the back of a VAT visit. This is not as part of any known pilot programme under which a business may have volunteered to have several taxes checked at once, but has been done in a somewhat underhand way.
VAT visits were properly arranged to review appropriate records right up to the end of the quarter to September 2008. The day before the visit, the VAT inspector telephoned the taxpayer to advise that he would be bringing a corporation tax colleague, purportedly for 'training purposes'.
In one case the taxpayer was not told in advance at all, the corporation tax inspector simply turned up with his VAT colleague.
It is disingenuous to think that the corporation tax inspector, in such circumstances, would not have taken the opportunity to look at business records, ask direct tax questions, or at least form an opinion on the quality of the business's accounting function.
Many of the records on display related to the current accounting period for which accounts and a tax return are yet to be completed and filed.
It may be that many taxpayers allow the boundaries to be pushed because they do not know any different. I fear that this will continue under the new regime with direct tax officers who are visiting business premises going beyond what the legislation allows.
This might include, for example, interpreting the power to inspect documents and assets too widely, or asking questions and demanding off-the-cuff responses from personnel who know little of HMRC's powers.
If a response later needs amending once the facts have been properly researched, the taxpayer will have to explain the error and demonstrate that the original answer was incorrect. This is often far harder than getting it right in the first place.
There are a lot of subtleties in the new rules, but some on-the-record observations by senior HMRC personnel give an indication of what HMRC think will and will not be permitted during a visit to business premises. Advisers would be wise to make sure they are fully aware of these points or have access to someone who is.
Inappropriate enquiries
An opening letter of a full enquiry into a small partnership's tax return letter was, not unusually, somewhat muddled between business matters and the private affairs of the individual partners. Unusually, it was accompanied by two appendices.
The first included a long list of the type of business records that HMRC might expect to see, most of which are unlikely to be maintained by any small business.
It may, however, be used to form the basis of an assertion that record keeping is inadequate, especially in future, given that FA 2008, Sch 37 enables HMRC to regulate as to what records should be kept for tax purposes.
The second appendix caused more concern and the Box, an abbreviated version of the appendix, shows why.
The questions are all directed at the personal affairs of the individual partners at a time when no formal enquiry has been opened into their tax returns. It should be noted that HMRC accept that the deeming provisions at TMA 1970, s 12AC(6) do not actually amount to the opening of such an enquiry.
Maybe it is a crude attempt to speed up the enquiry or a veiled way of letting the adviser know that this is a bigger, more serious case than it might at first glance seem, perhaps one backed by Special Civil Investigations or a Civil Investigation of Fraud team.
Either way, this seems a very heavy-handed approach for an opening letter of an enquiry into a small business.
Overall conclusion
Sadly, the chance that guidance and a reasonable commonsense approach will be followed by all HMRC officers on future enquiries seems slim. The examples above and the recent debacle of HMRC disclosing taxpayer information to a third party for a survey on taxpayers' experiences of the ODF show how far wrong things can go.
I am not saying that HMRC intend the rules to be bent by their staff; but experience suggests that officers at the coalface take unreasonable positions in too many cases. It is not for me to speculate why this happens; I merely observe that it does.
With increased powers, legislation capable of extremely wide interpretation, and reduced safeguards, for the main direct taxes in particular, I see many accidents waiting to happen.
If Mike Clasper, Lesley Strathie or Dave Hartnett is reading this, I urge them to publish a formal commitment that HMRC's officers will always act reasonably, consistently and in accordance with the guidelines.
This must be backed up by full details of how the policy will be enforced and what remedy is available to taxpayers when officers err. Without such a public commitment, I fear a cycle of mistakes, challenges and apologies that will further damage HMRC's relationship with taxpayers and their advisers.
Clearly, to protect their clients, advisers should be alert to any inappropriate behaviour by HMRC in enquiry cases. All too often, I see or hear about cases which ought to have been handled differently from the outset.
For example, in cases involving the inappropriate use of discovery powers, often HMRC's enquiries have been fully answered before the taxpayer's adviser consults me on how best to approach such an enquiry.
I am not advocating non-co-operation if an irregularity needs to be disclosed — that would be irresponsible and potentially counter-productive.
However, it is rarely a good idea to offer every scrap of data to HMRC in an unstructured way; every response must be properly managed, fully thought out and take account of existing legislation, rights and powers.
An adviser who is in any doubt about a new investigation should seek expert advice at the outset,
John Cassidy is a partner in PKF (UK) LLP specialising in tax investigation services. He can be contacted on 020 7065 0455 or john.cassidy@uk.pkf.com.
