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Key points
- HMRC resources may be limited after the pandemic.
- Furlough compliance checks are expected.
- Have the self-employed income support scheme conditions been met?
- The advantages and disadvantages of proceeding with enquiries.
- The litigation and settlement strategy requires enquiries to be cost effective.
It is true that HMRC is showing a fair amount of understanding in these difficult times. The department has put together mechanisms to allow furlough payments and business grants to be claimed. It is not surprising that, given the time frames, the system has not been flexible enough to deal with every eventuality. HMRC should be congratulated for such an achievement. However, this is not the ‘free for all’ as seen by many and there will be consequences for getting it wrong. Surely there will be limited public sympathy if overclaimed amounts are asked to be repaid, particularly if the ‘offenders’ are described as robbing the public purse. Repaying overclaimed furlough payments which have been passed to employees or self-employed income support scheme (SEISS) grants may be the straw that breaks the camel’s back for many businesses already struggling to survive. Limited liability will be no protection if the directors are pursued personally.
Many businesses may be lulled into a fall sense of security. In common with other government offices, HMRC staff were instructed not to return to their offices on 17 March. From 3 April the department offered to suspend existing enquiries and refrain from launching any new enquiries. However, we should not forge that, pre-lockdown, there were announcements of more HMRC resources to tackle non-compliance. It is safe to say that the Revenue will still be stretched for resources even after life resumes to whatever ‘normal’ looks like. While still performing a duty of care to clients, it should be borne in mind that patience is a two-way street.
Furlough payments
In general, furlough payments seem to have been relatively easy to obtain. However, mistakes will be made and amounts will need to be paid back. Agents may find themselves in the position of advising reluctant cash-strapped clients to voluntarily repay amounts, or else cease acting for the client and making a money laundering report.
The Treasury is forecast to have extra borrowing in excess of £300bn. It is inconceivable that it will not wish to check a proportion of these payments to ensure taxpayers’ money has been correctly claimed. Likely questions are:
- Were the employees eligible?
- Were the employees made to work?
- Were the correct procedures followed?
- Were the full amounts of payments passed to employees?
The latest figures are that more than 3,000 employees have come forward to inform HMRC that either their employer has not passed the furlough payments to them in full or that they have been asked to work while formally on furlough. It is expected these employers will be risk assessed, but most will receive notification of a check. There is a strong suggestion that tax officials will be carrying out unannounced visits on premises to check the position as the furlough scheme is due to continue in various forms for a number of months. The department’s fraud investigations service is expected to be involved in many of these – particularly the larger employers. Criminal prosecutions are to be expected as an early public deterrent is desired.
There will be a mixture of compliance activity. Those who have recently amended returns and have had increased payments can be expected to be among the first tier selected. After that, a wide range of business will doubtless be looked at and statistics gathered as to where the most amounts of money are being repaid. With limited resources, it can be expected HMRC will understandably ‘follow the money’ although it will not want any business to feel safe from a check.
HMRC is expected to investigate furlough payments through PAYE compliance checks and specialist task forces. Taxpayers can expect their furlough claims to be subject to checks for a number of years to come – certainly for at least four years. No one need think that because they do not hear from HMRC in the next few months they are in the clear.
Self-employed income support scheme
On the self-employed income support scheme, HMRC has been contacting taxpayers advising them of how much they think they can claim. Clients can then go online and make the claim. However, unlike furlough payments, an agent is not permitted to make the claim on their clients’ behalf. There is a question over eligibility to make a claim. For example, one of the criteria is that the business is adversely affected by the crisis. Various examples are given such as if there is a downturn in business or staff have had to be furloughed. The business must not have been able to organise its staff to work safely.
HMRC will be looking at the returns covering this period and if profits have increased to more than £50,000 the department will presumably ask for a refund. Similarly, an amount would also be due if the profits have reduced. But what if a subsequent investigation into a business that has been affected results in an increase in profits but not above £50,000? HMRC will presumably allow a revised claim for the increased grant which should be due within this period.
Any system that excludes the involvement of agents will surely be prone to error.
However, it is unclear how the Revenue will subsequently check whether the criteria has been met. It will certainly be considered any time there is a change in profit so will be considered as standard in full and many aspect enquiries.
Moving forward with Covid-19
As matters stand, taxpayer rights still exist even in furlough and SEISS compliance checks. The right to privacy and confidentiality, the right not to be interviewed (even by phone) without representation and the lack of rights by HMRC to interview staff. Third-party information notices can be expected: ‘What work did XXX Ltd do with you in this period?’
The latest announcement is that the Finance Act 2020 will allow employers and indeed those who have claimed SEISS a 90-day period in which to identify and correct any errors to HMRC. If they do not, any errors could be deemed deliberate and subject to penalties of up to 100%, but with a minimum of 30%. There is no concept of reasonable excuse mentioned. Those who do not come forward at all can expect the 100% penalty. Those that come forward but after the grace period may be better off. This is on top of having to repay the overclaimed amount.
The key message for advisers is to check or at least ask clients to check both furlough and SEISS payments have been correctly claimed now. The 90-day grace period is not a long time. There will, of course, be a certain irony in agents checking SEISS claims they were not allowed to be involved with.
Selection of other enquiries
The risk assessment for those returns already submitted will at least in part already have been carried out. If HMRC holds information before the enquiry window closes the taxpayer must receive the enquiry notice in time. If enquiries are raised after the enquiry window has closed, it will be worth asking exactly when the information held by the department came into its possession.
With a limited time to launch enquiries, HMRC is likely to concentrate on those it considers higher risk or simply to issue protective enquiry notices. An unwelcome alternative would be to extend the enquiry window. We have seen an extension of the appeal deadlines by 90 days, so HMRC may feel this to be a quid pro quo reaction. Further, we have seen a number of new COP 9 enquiries started in recent weeks. It would seem not all staff have been redeployed to investigate the furlough scheme.
HMRC is also keeping an eye on open enquiries to ensure possible discovery assessment deadlines are not missed. This makes sense, although how this will fit in with the offer to suspend enquiries remains to be seen.
Suspended enquiries
There are two different approaches seen here. One is where HMRC wrote to say it was suspending enquiries and the other where it gave the taxpayer a choice.
But what action should advisers take in enquiries if a suspension was offered? There are two schools of thought. One was to accept the suspension and wait for HMRC to come back. Depending on how long ago the period under enquiry was, there may be some benefit if years of assessment were falling out of date. If it was a more recent year, with plenty of time to go, this may not be relevant but we never know what may come out further down the line. Advisers may also wish for a change in officer due to the personalities involved.
The other school of thought was to refuse the suspension offer. Let’s face it, most clients do not enjoy the experience of being investigated by HMRC and may prefer it to be over as soon as possible. Will HMRC be so stretched for resources that it is likely to want to reach settlements (and tax payments) and not fight on for so long? There was no mention of interest abatement if a suspension was agreed. I do not suggest that taxpayers are going to ‘get away’ with anything, but perhaps they will reach the ‘right amount of tax’ position sooner.
We also know there has never been a better time to request time-to-pay arrangements with HMRC.
All in all, there is a decision to be made. It cannot be a good thing to allow HMRC to suspend without limit, and to allow it simply to pick off the cases as its own time frames permit while taxpayers endure continuing stress and accruing interest. Ultimately, this must be a decision for the client after hearing the pros and cons.
Alternative dispute resolution
We know the alternative dispute resolution (ADR) facility remains in operation. Although meetings in person are not possible, mediations by video and telephone call are available. There are obvious restrictions as to what can be achieved logistically. There has not yet been any indication or involvement with disputes over Covid-19 related matters, but it would be no surprise if this did happen in the future.
Tribunals
As with ADR, there are restrictions in holding physical tribunal hearings although it is understood that video links are being used. Sometimes, there are advantages to having a hearing in person in terms of how people come across as witnesses, for example. Many hearings are not held in person in any event. Video hearings will of course change the dynamics and in some cases possibly affect the outcome. We have encountered one counsel who had previously given a reasonable success probability in a case, but when a video hearing was suggested had a far less bullish opinion.
Written hearings have been long established and no doubt more thought should be given as to whether this is suitable.
Loss relief
Some clarity over the trading status of the self-employed and losses would also be welcome. We know some businesses are adapting their trade to reflect a change in demand due to the crisis. What if a trader temporarily ceases to make ice cream and starts making hand sanitiser? Will this be considered a new trade? Will losses be available to carry forward and use against future profits of what would be an unrelated trade?
Other compliance checks
The level of new enquiries from HMRC has fallen drastically but not completely. Certainly, we have seen VAT repayment claims being checked. There have also been a number of new checks launched into what the department may consider possible tax avoidance, usually mentioning loans.
We would expect the numbers to increase dramatically after a short lull. They may be different in nature, with less meetings and fewer checks at the business premises – how is the photo ID of someone wearing a face mask to be checked? This is nothing new in some respects, the so-called desk-based checks have been increasingly common for some time and many practitioners have found it increasingly difficult to arrange a meeting. HMRC will work smarter – at least it will feel it is operating more cost effectively from its perspective. This remains to be seen although success from HMRC’s perspective will surely be measured by the amount of extra tax collected.
The desk-based PAYE and VAT checks create their own challenges. Agents do attend several physical checks each year. At these they can discuss the format beforehand with the client and also manage, interrupt or even end the meeting as they feel appropriate and if this is in their client’s best interests. Many other compliance visits have not been attended by an adviser. It will therefore be important for firms to establish a system whereby they can identify clients who should run any written responses by them before submission to HMRC – even where these are to be submitted by the client themselves. This may be particularly relevant for PAYE checks which are accompanied by a very detailed questionnaire.
Remote meetings
There are also issues to consider for meetings being held over video or by conference call. If the client is not able to be in the same room as the agent there is a risk they could say something unhelpful or inaccurate before the agent has a chance to speak. It will also shift the dynamic of the meeting. We have all come across situations where HMRC is impressed by the client at a meeting and looks to close down the enquiry, but the opposite also happens on occasion. A client may not come across well and HMRC understandably digs deeper. What we can do is brief clients beforehand.
If possible, it is best to have the agent and client in the same room. The client should always pause before speaking so the agent has a chance to jump in. Very few of us like or enjoy the idea of being on camera and we are by definition going to come across as a little more unsettled than otherwise and HMRC should bear this in mind. Equally, the agent is not going to be so familiar with the experience as the HMRC officer may be.
It will be more important than ever to request a detailed agenda of what is to be covered. If this is deviated from the adviser is entitled to tell the officer that they will revert on a matter if it was not on the agenda.
Meetings are often useful to move an enquiry forward. However, they have never been compulsory and we have seen refusal to attend meetings being responded to with 20-page questionnaires. We must remember HMRC is duty bound under its litigation and settlement strategy to run enquiries in a cost-effective manner – including the taxpayer’s costs. Requests that require vast amounts of work should be challenged as appropriate to question HMRC’s perception of the tax risk. Similarly, everything must be reasonably required to check entries on tax returns. The officer should also only check an item once unless they have grounds for checking again.
If enquiries are to be conducted by post, we need to ensure the areas under enquiry are identified as early as possible – clearly easier in aspect enquiries. Once established, extending the enquiry into other areas should be resisted unless the department has grounds to do so that were not known at the outset of the enquiry.
In a nutshell…
Due to the unprecedented speed in which things are moving, it is important all parties remain aware of the issues and are flexible and understanding in their approach.
