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Agents uncertain over HMRC compliance checks

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14th May 2010
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A year on from the introduction of HMRC’s new inspection powers and compliance checks, tax agents and practitioners are still finding it hard to adjust to the new regime.

Evidence from the Chartered Institute of Taxation, CCH Fee Protection and AccountingWEB.co.uk members paints a picture of uncertainty, occasional inconsistencies and client ignorance about the nature of the visits and the potential penalties under the new regime.

The CIOT report HM Revenue and Customs Modernising Powers points out that over the past year, “there has been a greater level of response (formally and informally) on this issue than any other”.

Launching the report, CIOT president Andrew Hubbard was relieved that the worst fears about excessive and inappropriate use of the new powers have not been realised, but noted a lack of clarity about who the new powers will be applied in which circumstances.

 “Additionally, we have identified concern around how the new penalty regime is being operated,” he said. “HMRC seem reluctant either to impose high penalties for deliberate understatement or to accept that there have been innocent errors in some cases, instead going in almost every case for the middle option of determining a failure to take reasonable care.”

CCH Fee Protection confirmed that by December 2009 claims were up 60% on the previous year following the introduction of the new regime. CCH highlighted the issue as one of the top sources of practitioner stress, mainly because they and their clients’ weren’t sure about how to deal with the checks.

According to CCH, practitioners still need to get used to the idea that compliance checks range across all types of tax and can expand into full aspect enquiries that take in previous years.

To add to agents’ stress levels, the CIOT report noted that in some cases where agents don’t have authorisations to act on a client’s behalf for a particular tax type, they may not even know that an enquiry is taking place. Often tax agents will advise clients on some aspects of their tax affairs, but not get directly involved in the process because of the paper chain that can result. HMRC’s current systems for agent authorisation do not lend themselves to setting up this type of authorisation, the CIOT noted, so for the moment an informal workaround has been created that does not undermine client confidentiality but still allows agents to be aware of enquiries.

As the new regime bedded in, our online discussion group on HMRC’s new powers devoted considerable time to understanding how they were being applied. Discussion group leader Ros Martin commented: “As with all new powers gained by HMRC, it is important to appreciate the scope of the new provisions which underpin the new approach. It is vital that HMRC do not exceed their powers simply because taxpayers do not understand what the limits are. Equally, it is unhelpful if taxpayers argue against new procedures which are in fact legitimate as this increases frustration for all involved.”

Within the group, lecturer Malcolm Richards highlighted the shift away from the old regime of time-limited windows around each tax return to the more wide-ranging approach that underpinned compliance checks. Under the new regime, HMRC can undertake reviews not related to submitted tax returns (including pre-return compliance checks) and will routinely use their new information powers to routinely look at years for which the enquiry window has closed, he explained.

Overall, the CIOT research found that three quarters of respondents felt the checks had been conducted ‘acceptably’. Cross-tax compliance checks are still relatively uncommon; only 25% of its survey respondents experienced such a check, but the percentage will increase over the next few years. Those who have experienced them felt the cross-tax checks were more effective than having separate enquiries (based on a sample of 64 practitioners).

“There is a broad measure of support for the concept, but concern about the practicalities,” concluded the CIOT. As is often the case the sticking points relate to HMRC staff training and skill levels. “Cross-tax working is something which should be supported. It must make sense for a client’s tax affairs to be looked at in the round, rather than on a piecemeal basis. But this will only work if HMRC develop cross-tax skilled individuals, particular those who deal with small businesses,” said the CIOT report.

One survey respondent commented: “Officers making the checks often have insufficient technical knowledge and lack some of the basic accountancy skills resulting in inappropriate and incorrect findings.”

Another respondent added: “HMRC is really beginning to show the loss of a whole class of experienced, pragmatic Inspector of Taxes and the well-established practices that had served the country for the last generation. We are now dealing with staff who can barely follow the manuals they have been given, resulting in the constant referral of cases up the line, causing stress and unnecessary costs for all parties involved. Consequently a short term gain in HMRC’s staff costs is leading to a long term loss to the Exchequer.”

With the stick of harsher penalties lurking beneath the intended carrot of helping those who do want to meet their obligations, there is a degree of ambiguity surrounding the compliance check process, particularly where the check does not relate to a specific return submitted. To help guide both parties, Martin quoted guidance from HMRC’s Compliance Handbook on situations where a pre-return compliance check might take place:

  • to assist with clearances, pre- and post- transaction ruling requests
  • where a trader regularly discloses an error (by making a voluntary disclosure) after the submission of a VAT return
  • checking the hidden economy where waiting for the submission of an SA return may mean unacceptable delay
  • to check the computer systems operated by the taxpayer to ensure that the way in which information is kept will lead to accurate returns being made
  • to find out about tax planning and avoidance schemes
  • where fraud is suspected.

And should they so choose, traders can invite a pre-return compliance check, she added with a hint of scepticism.

To summarise the key points surrounding the new compliance check process, AccountingWEB.co.uk Tax Editor Rebecca Benneyworth commented that practitioners needed to step back from the detail of each year’s return and appreciate that the new powers covered a much wider range of checks.

“For smaller businesses HMRC are now focussed on records and controls as they have established that the quality of records kept can be poor, and then even if the taxpayer wanted to pay the correct tax he would not be able to,” she said.

“If a compliance check established that sales appear to be under-recorded by reference to an in-year visit which looks at the process of recording sales and so on, then we have BIG problems, as this amounts to discovery and you are looking at six years. So it is sensible to look carefully at even small clients and encourage them to up their game and get better at recording the basics, and laying down some evidence as to completeness of income. This is so much more pro-active than checking the return after it has been filed, at which point you are at the mercy of whatever records there are.”

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Me!
By nigelburge
17th May 2010 17:56

HMRC really do need to address this

 “HMRC seem reluctant either to impose high penalties for deliberate understatement or to accept that there have been innocent errors in some cases, instead going in almost every case for the middle option of determining a failure to take reasonable care.”

 I noticed that on a joint Learning Together course that I attended, although some delegates from HMRC were willing to accept that innocent errors can be made, many others simply did not believe that a taxpayer could ever (well - hardly ever) make an innocent error. Indeed in some cases, the total lack of any commercial nous and reality really was quite alarming.

There really is little point in having a new penalty system if all the "old lags" of HMRC are just going to ignore it and carry on doing what they always have done.

Either we as practioners are going to have to deal with this ourselves by regularly taking cases to the first tier tribunal on a pro-bono basis, or the training that HMRC gives its staff has got to substantially improve to reflect commercial reality and just plain common sense. 

(Why do I suspect that the latter just won't happen?!)

Thanks (1)
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By Ros Martin
18th May 2010 08:25

Learning Together

I also attended a Learning Together workshop and would entirely agree with the previous posting.  The other issue which emerged from that course was the severe limitation that HMRC are putting on the interpretation of the 'reasonable care' defence against the tax linked penalties. 

I am going to start a new thread on the Compliance Check forum to see what practical experience our readers have got of the new regime if anyone is interested in joining in!

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By david5541
03rd Jul 2012 16:33

whos working together?

the inspectors and officers I have met on the ground doing all the chores announced by the press releases here seem to say the same thing:

its nigh on impossible to get Customs and excise compliance staff working alongside "HMIT" staff even when they are in the same building such as in croydon because the national systems are so different!

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