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KEY POINTS
- Inadequate records and damage limitation.
- Openness and early dialogue to replace TMA 1970, s 9A enquiries.
- The new regime of compliance checks.
- Using information powers rather than enquiries.
- Should agents be challenging HMRC more often?
- How will HMRC staff morale impact on the new process?
I began to think about the changing face of HMRC enquiries while looking at Nick Morgan’s e-book, Tax Investigation for Dummies, subtitled Everything you wanted to know about a tax investigation but were too afraid (or too skint) to ask.
It must be said that this book is not completely up to date, because the circumstances described happened before the FA 2008 changes to powers and safeguards and the introduction of the new tribunal system.
I had heard from Nick before while his enquiry was ongoing; indeed a substantial number of tax professionals will have heard from him during the course of his ordeal.
Nick is a freelance journalist and has described the experiences of his enquiry blow-by-blow on his website. The discussions between himself and HMRC were far from being a meeting of minds, and the enquiry was marked by mutual incomprehension and hostility.
He opted to handle it himself and essentially made such a nuisance of himself that in the end he got a reasonable settlement, given that the figures he had entered on his return seem to have been a bit of a mess.
However, in the course of it, he did manage to get his file released to him under the Data Protection Act, including his risk scores. These were detailed under seven headings:
- Trading losses (non-farming).
- Three-line account – expenses high.
- Turnover has fallen.
- Incorrect claim for trading losses.
- Low means.
- Retirement annuity relief new claim.
- Employment with self employment.
- Retirement annuity relief used in earlier year incorrect.
Strangely, for each of these items he scored either 1 (low risk) or 6 (apparently extreme risk). Now there may be other headings that did not apply, but the suggestion seems to be that the risk assessment process has been curiously unsophisticated, and even appears not to have had the year-on-year comparisons beyond the question of turnover.
Small wonder, then, that HMRC has been happy to extend the three-line account limit.
Stop digging!
Now quite clearly this was one of those worst-case enquiries. I am sure that none of you, dear readers, have got into such a mess with your own clients, but equally many of us have had the experience of being asked to help in a situation where the taxpayer and his or her advisers have dug themselves into a very deep hole and the best that can be done is to limit the damage.
At the same time, it follows that all of us will have handled cases where we do the best we can for a client whose records are not all they should be, but are not at all convinced at the end of the day that justice has been done.
The offence has really been one of failing to keep adequate records, but the worst conclusions have been drawn from this and a sensible analysis of the position has seen little hope in going to the commissioners.
Experience says that over time they have largely accepted HMRC’s arguments about unidentified credits, even where some kind of explanation has been offered and the redrawn picture of the business is implausible.
I have seen cases where a sole trader craftsman has his turnover driven up to a point where it would have needed three or four men to do the work.
Openness and dialogue
But there is more to it than this. Over the last several years of consultation a lot of time has been devoted to persuading HMRC that enquiries under TMA 1970, s 9A were wasting the department’s time and resources.
Furthermore, that the way in which they were conducted, especially the refusal to say why a return had been selected, did not lead to the right conclusions from their end.
To a considerable extent, HMRC have accepted this argument, and this has led on the one hand to a very substantial fall in the number of s 9A enquiries, and on the other to the experiment with ‘openness and early dialogue’, which has apparently led to a speeding up of enquiry work.
Of course, all of this should have changed with the introduction of self assessment, when enquiries were supposed to be carried out in a new spirit.
I remember – as some of you will remember – the ‘Faster Working’ initiative, which sank into the sand at considerable speed, unwanted, it appeared, by both inspectors and the profession, who apparently preferred to plod on in the same old adversarial way.
It might not have been a very pretty dance, but we all knew the steps. But when it became a kind of ritual, that made it even worse for the unrepresented or for the inexperienced agent who does not know them.
Plausible explanations
Now we have all faced enquiries from HMRC where at the end there was a great sense of unfairness, nearly always stemming from the application of the view that if you can’t prove it wasn’t taxable income, then it was.
I would not say that most enquiries end up that way, but a substantial number do, and mostly this happens because the taxpayer offers an explanation only after he finds out he is in trouble.
I recall one client with a gambling explanation that was in fact extremely plausible; he clearly devoted most of his time to it - but he only came out with it late in the day, having at first denied it, and so reduced his chance of being believed.
What we now have is a regime of compliance checks. What HMRC says is that:
‘These changes will:
- increase HMRC’s ability to make cross-tax checks;
- make it possible to look at records for different taxes on a single visit;
- introduce a more flexible approach involving a wide range of checks more geared to different taxpayer behaviours;
- ensure the checks undertaken are proportionate to the risks identified;
- ensure consistent standards in the application of powers; and
- reduce the time it takes to undertake a compliance check and therefore reduce the burden on both the taxpayer and HMRC.’
Information rather than enquiry
Much of this is designed to leave the taxpayer feeling more confident about his or her record -keeping rather than feeling as though he has been hit round the head with a bottle.
In practice, what is mostly happening is that HMRC are using their information notice powers (or, more precisely, are usually doing informally what those powers would allow them to do).
The department say that they can require taxpayers to provide information and produce documents that are reasonably required for the purpose of checking a tax position.
HMRC do not have to make a discovery first. The recipient has the protection of a right of appeal or prior approval by an independent tribunal unless the information or documents relate to records the person must keep for tax purposes (statutory records).
People keep saying to me: ‘I’ve had this letter that looks like an enquiry notice, but it’s for an out-of-date year, and it doesn’t mention s 9A. What’s going on?’
Well, that’s what it is and it usually means that HMRC has solid information that the item they are asking about is wrong.
What it does not mean is that this will be followed up by an enquiry of the traditional sort; it is much more likely that the correction will be accepted and the matter closed.
We have not seen the last of the s 9A enquiry, but there are far fewer of them being carried on. HMRC tell us this and it is also being confirmed by agents; I know it because the number of cases referred to me has fallen sharply.
Furthermore, where these do happen we should now be seeing the new approach called ‘openness and early dialogue’ under which the inspector will actually tell you why you have been picked. I think there will be little nostalgia for the traditional guessing game.
Also, HMRC have refocused their efforts to address the concern that they have always gone for easy targets rather than doing the hard work on the shadow economy. Increasingly, too, the focus will be on campaigns like the forthcoming new offshore disclosure opportunity.
Good and bad news
Now there is good news and there is bad news. The good news is that there ain’t no news. Everybody has been waiting for HMRC officers to overstep the mark and to interpret the new powers over zealously.
So where are the cries of horror ? As a member of the body set up by HMRC to keep an eye on the new powers, I (and the other members) have sought diligently for evidence of abuse, and so far none has been reported.
There is some concern that agents may not be challenging HMRC officers who are overcooking their powers, but certainly no hard evidence for this. So far this is bad news for the paranoid tendency, but good news for the rest of us.
The bad news – one might even say the alarming news – is that the latest staff survey (taken in May 2009) shows that morale among HMRC staff continues to worsen.
This is very bad news for HMRC, because it has been delivering a substantial programme of internal training designed, to some extent at least, to show them that they really are part of a viable organisation, though it may be that everyone was still uncertain about the onset of the new powers.
It would seem that continuing staff cuts and economies are the problem now. I, for one, would sooner deal with an inspector who is happy and confident in his or her work and likely to be more open to ideas. It is the unhappy or unconfident officer who digs in their heels unreasonably.
The new culture
In that context, I worry about HMRC’s promise of a ‘new culture’ where locally based compliance staff attempt to: understand the taxpayer’s perspective of business and of HMRC; make their interventions proportionate to the risk; be more commercially aware; and actively to think about keeping the burdens low.
They should realise that people do make honest mistakes and that compliance work does cause stress. That needs confident and secure departmental staff who are sure they will not be marked down for not chasing every last penny, but for moving on to something more profitable.
The intention is that local compliance officers should: target low-level evasion in the shadow economy; check business records with a view to helping people get it right rather than slapping them down; and try to help positively with ‘evasion aftercare’ – the new ability to seek extra information from those who have been found wanting.
It all sounds good. It is the three years or so of uncertainty and confusion since the merger and now of even more cost cutting that is the problem.
I just hope that the battered vessel that is HMRC is going to be sufficiently seaworthy.
Simon Sweetman is a self-employed tax consultant and can be contacted by telephone on 01394 274857 or by email.
