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New compliance interventions ' The debate. By Rebecca Bennyworth and Nichola Ross Martin

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7th Aug 2006
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Last week the Chartered Institute of Taxation called for HMRC's 'interventions' pilot to be suspended. AccountingWEB's tax experts Rebecca Benneyworth and Nichola Ross Martin consider the CIOT's complaint

Rebecca Bennyworth

New compliance interventions ' what went wrong? By Rebecca Bennyworth

HMRC announced earlier this year that new compliance interventions were to be introduced as part of the new relationship with businesses. The document "Progress towards a new relationship: How HMRC is working to make life easier for business" included details of the department's plans to change the culture of tax investigations, and to provide more appropriate compliance interventions for many taxpayers.

The plans outlined were described in some detail, and it is clear from subsequent events that some time and thought had been put into the new ideas, and that plans were well advanced.

In essence, the new proposals could also be subtitled "And make more effective use of our own resources" as detailed reading of the proposals indicated that the "sledgehammer to crack a nut" approach to self assessment enquiries was to be abandoned, in favour of a culture which assumes that most taxpayers want to get their tax right, so deserve support and help. Strict measures and detailed enquiry would be reserved for those who deliberately seek to pay less tax than they are liable for.

So far, so good, although HMRC's powers to do some of the things suggested aren't clear at present. Never mind, there is a "powers review" in progress, so the two can go hand in hand is probably what most of us thought.

Then came the announcement that the new measures were to be pilot tested in some areas this summer. News of the "softly softly" approach received muted comment, until accountants started having actual experience of the new measures. Then the wheel came off! The Chartered Institute of Taxation (CIOT) has published a letter to HMRC expressing extreme concern at the developments and asking for the pilot to be halted until the main concerns expressed by the body can be addressed.

So what went wrong? Are we, the profession and they, the tax authority, doomed to be ever opposed to each other? Is there no hope that the new approach could offer benefits to all concerned?

My heart sank when I heard about the call by the CIOT to halt the pilot. I could almost hear senior people at HMRC sneer about predictable opposition. I pondered whether in these days of almost no differences between political parties whether the "them and us" culture has found its last resting place in tax.

Then I studied the Institute's paper in detail. Phew! HMRC have really been taken to task on pretty much every aspect of the pilot, from the draft letters, which were provided to the professional bodies to review, to the technical content of the letters and through to comments about dealing with taxpayers by telephone. In 24 detailed pages of analysis, the tax body has highlighted some very important issues of principle, which are underpinned by the overall comments in the executive summary:

"Before doing this, we would like to reiterate our view that the process would have been greatly improved had there been real and effective open consultation.

"But reviewing these letters (after they had gone to press) makes us even more disappointed that we did not have the opportunity to comment on the processes and the letters at an earlier stage."

So have they blown it? The opportunity to make a joint approach work from the outset has been lost, but is the chance to really "work together" gone for good? I guess we shall have to wait for a response to the CIOT's paper to find out. Why did this happen? Are those at HMRC responsible for this new approach so confident that they could do this without our experience and knowledge? Was lack of time the problem? Could the outcome of this be improvements all round and recognition that the best results are obtained when both sides really co-operate?

Nicola Ross-Martin

Deductions for tax: Clear as mud. By Nichola Ross Martin

With such a complex and confusing tax system it is not surprising the taxpayers make errors in their returns here and there. According to recent research, 40% of company returns are completed incorrectly, although this statistic does is not borne out by HMRC's findings in tax enquiries. We do not know the statistics for individuals and partnerships, but even if we did there would be doubt as to their accuracy.

Combine the inconsistent and often inaccurate advice metered out by HMRC from time to time, with an increasingly complex tax system, and it is more than likely that many taxpayers are simply claiming the wrong things year on year - quite oblivious to this fact. In many cases, it will be because they have got one fundamental point wrong, and unless this is ever picked up by enquiry they will never know any different.

Last week the Chartered Institute of Taxation (CIOT) called for the 'interventions' pilot to be suspended. Amongst its complaints were what it identified as 'technical issues'. The latter included:

# Technically inexact (or erroneous) references to how the legislation applies. These are likely to lead taxpayers to believe they have tax to pay when in fact there is none.
# The inclusion of difficult technical areas within the pilot, such as asking taxpayers to self-audit the difference between repairs and improvements.
# The use only of web-based guidance, which may not be suitable for all taxpayers. There is no reference to Enquiry Centres and no leaflets or explanatory notes are attached.
# The very poor quality of the technical cross-references which are provided, some of which are wrong, and most of which will provide the taxpayer with no useful assistance. To give just one example, taxpayers seeking to understand the difference between a repair and an improvement are referred to http://www.hmrc.gov.uk/manuals/bimmanual/BIM37000.htm This is the index to the 'wholly and exclusively' section of the Business Income Manual, which includes over a hundred paragraphs.
# Lack of clarity as to what is being asked for.

The CIOT have a point. Given that that the information in HMRC's manuals are the main source of guidance on the tax legislation for many tax payers and agents, should not HMRC be working to ensure that the advice they mete out as a department is 100% accurate, before attempting in intervene into tax payers returns?

The individual problems picked up by the CIOT are, well, sloppy - there is no other word for it. Yet another problem to be resolved in that troubled department. Irrespective of who is checking and proofing whose work though, there are some areas where the advice is just plain misleading.

Preparing for another tax tutorial, this time on deductions for tax, I have been reviewing what HMRC publish in their manuals compared with case law on a topic by topic basis. Repairs is one large trouble spot, and motor and travel claims is fairly messy, but nothing is quite like the topic of subsistence.

It continues to baffle taxpayers and agents alike. Someone even emailed me last week to ask why I said in a tax tutorial that it was virtually impossible for most self-employed individuals to claim subsistence on a regular basis when the Revenue's 'enabling letters' had, after all said:

"Can I deduct the cost of a business trip?
If a business trip requires you to stay away overnight from your home reasonable costs of subsistence including lunches are allowable. Except when you are away overnight on business the cost of lunches is not normally allowable. If you habitually travel on business (for example as a commercial traveler) or make occasional business trips outside your normal pattern of travel you can deduct modest lunch expenses. Where your family accompanies you on a business trip their costs are not allowable."

This wording was based on an answer given by the then Financial Secretary to the Treasury, Mr. Robert Sheldon, per a Hansard extract in 6th December 1976.

In response to the question whether: "In view of the fact that the legitimate and reasonable expenditure on food necessarily consumed during the course of travel is allowable as an expense against tax for the employee of a company (the Chancellor of the Exchequer) will seek to amend the law so that the identical expenditure incurred by a self-employed person is also allowable"?

Mr Sheldon replied: "In practice, a self-employed person may be allowed a deduction for modest expenditure on meals consumed in the course of a travelling occupation or an occasional business journey outside the normal pattern I do not think that any change in the law is necessary'.

The problem is that this all implies that subsistence is something capable of a pretty regular claim. This is actually not at all true. There are 'travelling occupations' and 'travelling occupations' just for a start. This means that a long distance lorry driver can be motoring up and down the country and claiming the cost of his 'Yorkies', as advised by the Road Transport Association, but the builder in Horton v. Young [1972] Ch 157; 47 TC 60, who despite being described as 'itinerant', and so also has a 'travelling occupation' will probably fail in his claim.

He fails because the leading case is Caillebotte V. Quinn [1975] 50 TC 222; [1975] 1 WLR 753 and involves a carpenter, and has long been used by HMRC to attack every subsistence claim going. It makes it virtually impossible for any jobbing builder, carpenter or subbie, itinerant or not to claim lunch. This is not always because they are all necessarily wrong in making their claims (and we do not see the arguments put forward). On a cost v. benefit basis it is not worth taking these cases to the high court.

There is a whole lot more to subsistence claims than a small paragraph in a letter would let on.
Whatever taxpayers can deduce from the guidance on offer about items such as subsistence, or repairs, they should at least not be subject to tax geared penalties if they get their claims wrong. Small mercies, but you would have to argue the negligence point, and most taxpayers may not realise this is possible either.

Nichola Ross Martin FCA BA (Hons)

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Replies (8)

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By baseline
07th Aug 2006 13:46

Wind Power!
The outside air is full of potential energy that if captured can turn a lot of wind into useful electricity. The problem is, its just too costly and erratic to capture and can only be a small part of a nations energy requirements.

And so it is with Treasury revenues, the potential is enormous for some streams of income. You can spend a lot of time and effort chasing the wind to have very little return on expenditure.

Regrettably, we are not privy to just how much its costing taxpayers for HMRC to chase phantoms. So who are the bright sparks at the Treasury who have convinced our gullible MP's that such things are possible?

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Dennis Howlett
By dahowlett
07th Aug 2006 14:48

Worrying
I personally find this worrying. I said before that I saw no evidence of practitioners fighting the clients' corner. Clearly the consultation process has been weak.

As a profession, surely 'we' have to ask why and propose sensible policies that would avoid the inevitable hand wringing that will emerge.

It's all too little and too late. Rebecca may be right about 'us and them' but there are ways to overcome the current hiatus.

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By kevin9
07th Aug 2006 13:27

a nal
I do think Alastair's suspicions are correct.
Nicola, sorry to sound a bit sad/[***] etc., but I think that the verb you were looking for is "mete" not "meter". Meter is the US (yuk) spelling of metre, however metre is not a verb.

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By AnonymousUser
08th Aug 2006 14:37

I should like to know ...
... if a taxpayer who has received an enabling letter in one year subsequently comes under an enquiry in a subsequent year the conclusion of which gives rise to an adjustment, does the fact that an enabling letter was issued to him in the previous year give rise to a potential restriction of penalty mitigation for the year under enquiry?

And again, if that adjustment to the later year is sufficient to justfy reopening the previous year (in respect of which the enabling letter was originally sent), does the earlier issue of the enabling letter potentially restrict the mitigation of penalties for that (earlier) year, given that no repair to that earlier return has been filed in response to the enabling letter?

I can foresee HMRC attempting to argue that where a taxpayer has been placed on specific notice, and fails to act on that notice, then the degree of culpability in respect of subsequent errors (or earlier errors not repaired) is augmented and therefore more "severe".

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By listerramjet
04th Aug 2006 17:16

I do hope I am wrong
but it strikes me that HMRCs attitude to agents is that they are part of the problem rather than part of the solution. And it further strikes me that this attitude has become more prevalent quite recently.

I am sure the CIOTs response was considered, and I am sure they took into account its likely impact before they released it. It would be worrying if the experts were not able to provide constructive criticism for fear of reprisal.

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By AnonymousUser
09th Aug 2006 12:40

We had one of these letters ...
... for a taxpayer who had a significant drop in income for 2004-05. The reason for the drop was identified and fully documented in the white space. It did not stop the issue of the enabling letter (of course the drop in income might not have been the reason for the letter, but I would bet that it was).

So this year, when the income returns to normal, I am considering white-spacing a comment that the increase in declared income has arisen not as a result of the enabling letter but rather as a result of making more money. I would not want the case to be recorded as a statistical justification for the enabling letter. Not that the comment would do any good, of course.

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By User deleted
09th Aug 2006 11:27

Re. Clint's comment
Bearing in mind that the parameters used by HMRC to mitigate penalties are set internally, there is every reason to suppose that any compliance issue discovered during an enquiry following the issue of one of these intervention letters in which the “customer” has been asked to review a relevant point will invite retribution in the form of lower mitigation..

I would not be surprised if HMRC will do some form of statistical survey to check on the effect of these letters.

For example it would be pretty easy to check whether items such as private use adjustments had increased in the SA return following the issue of a relevant letter on receipt of the next completed SA return.

Also it would not surprise me to learn that “the computer” will pick out a statistically significant sample of taxpayers who have received such letters for a full enquiry in due course to see whether their compliance is better o worse than some previously defined average.

[email protected]

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By Peter Horsman
11th Aug 2006 12:37

To co-operate or not?
My firm has received enquiries which are out of time under s9A, but apparently in time for these alternative intervention enquiries! To use AIEs to streamline administration is one thing. We would support that. But to (attempt to) use it to drive a coach and horses through statutory enquiry deadlines clearly imposed by Parliament is quite another thing. And, in my view, unacceptable. So we are not co-operating with the pilot scheme.

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