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An inspector calls: HMRC’s new extended powers

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2nd Feb 2010
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Under its new extended powers HMRC is opening enquiries with more certainty of getting a financial result than ever before, so it’s essential that accountants prepare their clients in advance, argues Phill Robinson.

In the context of mainstream direct tax liabilities of businesses, there has been a massive extension of HMRC’s powers. The new legislation provides for statutorily authorised ‘fishing expeditions’, which means that when HMRC starts an investigation they may already know that there’s something in it for them, so accountants should take steps now to protect their clients and themselves.

Inspections:
What can HMRC inspect?
HMRC can carry out an inspection of business premises (which includes vehicles and parts of homes used for business purposes), business assets and business documents. This could include private bank accounts which receive transfers from business accounts for drawings and salaries, for example. There is an urgent need to make sure that transactions into and out of private bank accounts are properly identified and annotated, because HMRC will treat unexplained deposits as taxable without evidence to the contrary.

What about verbal information?
The best advice to clients is undoubtedly to save all conversation until an adviser is present. Will taxpayers be obliged to answer questions? HMRC’s Richard Davey has said: “It is not intended that this amounts to a right to demand an oral reply to a question…a person refusing to answer questions will not incur penalties for obstruction”. This is good news for all taxpayers and businesses – just ensure that you and your clients don’t give verbal replies that could come back to haunt you later.

Even if only the current year’s records are examined, there is still significant risk because weaknesses in current year records will be extrapolated backwards to justify assessments for earlier years. There will be far more discovery assessments under the new regime and HMRC will be making those assessments and opening enquiries with far more certainty of getting a financial result than ever before.

What all this means is that the advent of the new inspection regime requires taxpayers and advisers to collaborate in planning transactions and planning the records that underpin them in order to produce the tax result that the parties want. All too often accountants only get to know about their clients’ transactions well after they have taken place when the time comes for accounts preparation. That is too late. Taxpayers have to be made to understand that tax and accountancy professionals are just as much an essential part of the transaction planning process as solicitors and bankers.

Business records

Under the new compliance regime the focus is intensely on business records. Everyone needs to accept right away just how important defendable and accurate records are under the new compliance regime and that HMRC will be expecting high standards. Detailed advice on appropriate standards of ordinary business record-keeping is an essential part of the service advisers should be offering their clients - a failure to do so will mean that taxpayers are far more vulnerable to inspections than they should be.

When can HMRC inspect?
HMRC has the power to enter and inspect if ‘the inspection is reasonably required for the purpose of checking that person’s tax position’.

Advisers need to be aware of just what is meant by a person’s ‘tax position’. This covers anything relating to any payments between HMRC or overseas tax jurisdictions and taxpayers in either direction and covers the past, the present and the future. It would be hard to think of anything broader.

Unfortunately there is no right of appeal against a decision to inspect and no opportunity to check the reasonableness of the decision to inspect. What’s more, HMRC has said that all compliance checks will be selected for a reason. Taxpayers are therefore well advised to treat every notification of an inspection as meaning that something has been identified that makes HMRC think there is a problem.

Inspections should never be treated as low-risk matters of routine.

Penalties

The vital point to bear in mind is that the new statutory minimum penalties are higher if disclosure of the inaccuracy is prompted.

‘Prompted’ means that a disclosure is made at a time when a person has reason to believe that HMRC has discovered - or is about to discover - the inaccuracy. This means that any disclosure made after HMRC announce an intention to undertake an inspection will be prompted. That is certainly HMRC’s view and is likely to be right. The result would be minimum penalties of 15% for a careless inaccuracy, 35% for a deliberate inaccuracy with no concealment, and 50% for a deliberate inaccuracy with concealment. Remember - those are minimum penalties, achievable only where there is perfect disclosure in relation to the default. The almost unachievably high published standards of telling, helping and giving access mean that very few (if any) taxpayers will qualify for the minimum penalty.

Given human nature, the likely analysis is that the real penalty will be higher. Therefore, for a careless inaccuracy the best taxpayers can hope for is 15%, and in practice it is likely to be 20% or more. For ‘ordinary’ tax investigations that are the cannon-fodder of everyday enquiry work for HMRC (e.g. the corner newsagent or general store, the taxi driver, the garage owner) 35% is the lowest possible penalty and the reality is likely to be 40% or more of the potential lost revenue. That is a massive increase over what taxpayers would have encountered under the old penalty regime.

If an adviser is given the opportunity to preview what HMRC will be likely to see during the investigation then the chance of identifying potential problems (and saving money on penalties) will be optimised, so get involved now to review records to identify potential weaknesses and disclosures. When HMRC announces that a compliance check is coming, don’t delay - get your tax adviser involved immediately to help your clients hang on to as much of their money as they can.

Phill Robinson is managing director of IRIS APS.

 

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By tuliptownman
09th Feb 2010 12:54

Can HMRC demand a series of oral replies aka a meeting?

Quote: HMRC’s Richard Davey has said: “It is not intended that this amounts to a right to demand an oral reply to a question…a person refusing to answer questions will not incur penalties for obstruction”

Is this quoted in any official HMRC documentation please?

Over the last year, HMRC have taken a far more agressive stance on meetings even to the extent of threatening increased penalties for non co operation citing page 4 of IR160 which states

“Co-operation - A reduction of up to 40%. If you supply information quickly, attend interviews, answer questions honestly and accurately, give all the relevant facts and pay tax on account when it becomes possible to estimate the amount due, you will then get the maximum reduction for co-operation." 

This is at odds with page 11 COP11 that states 

“You do not have to attend any meeting, but we will expect you to provide promptly any information we consider essential to our enquiries. Meetings allow you to clarify and explain any points you think we may not have understood, and ask questions as well. If we believe that correspondence will not be an adequate substitute for a meeting, we will make this clear to you." 

Even the last sentence gives them the door to a meeting. 

What powers do HMRC have to insist on a meeting and what defences are available? 

The problem with meetings is not that the average client has anything to hide (although sometimes they may give an answer that may confuse the issue and actually be a red herring that HMRC can jump on). The main factor is that many HMRC Officer’s no longer have the power to agree to any orally negotiated adjustments and are often overruled by Line Managers resulting in a lack of certainty and a feeling that time has been wasted. Whereas anything put in writing should be after more thought and consideration and would be harder to withdraw.

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