Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

TaxZone Newthwire 92 - Tax investigations update

by
6th Feb 2006
Save content
Have you found this content useful? Use the button above to save it to your profile.

Editor's Note
=============
Tax investigations and enquiries have been the subject of
regular queries on Any Answers, and remain one of the major
preoccupations of small practitioners. This subject has been
covered, to one extent or another, in the following previous
Newthwires:

No. 2 - Enquiries and investigations - 27 May 2002
No. 32 - Interest and penalties, Part 1 - 4 Aug 2003
No. 34 - Interest and penalties, Part 2 - 1 Sep 2003
No. 49 - Fraud, searches and prosecutions - 13 Apr 2004
No. 61 - Tax geared and capped penalties, Part 1 - 27 Sep 2004
No. 62 - Tax geared and capped penalties, Part 2 - 11 Oct 2004
No. 72 - Self assessment enquiries - 21 Mar 2005

Contents
========
1. Merger of the departments
2. HMRC reorganisation
3. COP 9 and Hansard
4. Money laundering
5. Current investigation issues

(a) Private bank accounts
(b) Meetings
(c) Working papers
(d) Failure to close
(e) Mandates
(f) Production of documents
(g) Section 19A notices

6. IDEA
7. Enabling Letters
8. Settlement
9. Professional expenses insurance
10. Conclusion - Prevention

1. Merger of the departments
============================
Since I first wrote on this subject, we have seen the merger of
the Inland Revenue and Customs and Excise into one department -
HM Revenue and Customs.

If there is one area of taxation that will be affected by this
merger, it must be tax investigations and enquiries.
Traditionally, VAT inspectors have adopted a much more
aggressive approach to investigations, using, in some
instances, powers exceeding those of the police. Will the
procedures of what was Customs and Excise be adopted for direct
tax purposes within HMRC? Or will the more statutory and well-
researched practices of what was the Inland Revenue soften the
previously more aggressive approach of VAT inspectors?

Time will tell, but it has been announced that, as from 1
September 2005, tax investigations and enquiries will be
conducted jointly by direct tax inspectors and VAT inspectors.
This fact needs to be taken on board by all practitioners.

Two obvious implications are apparent. First, if an
investigation meeting takes place, it is likely that
representatives from each branch of the department will be
present. It is imperative that the accountant finds out before
the meeting who will be present from HMRC.

Second, it has been the practice of what were VAT inspectors to
call on registered businesses without appointment, and in an
obvious attempt to question the registered trader without the
accountant being aware of the visit or being present. Clients
must be forewarned of this possibility. Except where a 'raid'
under section 20C, TMA 1970 is in progress, there is nothing
wrong with the trader stating politely that it is not
convenient to hold a meeting at that time, and could the
inspector(s) arrange another appointment.

Planning Point

Accountants must take on board that investigations and
enquiries are now likely to be carried out jointly by direct
tax inspectors and VAT inspectors. They should make sure that
they know the names and functions of those to be present at any
meeting. Clients should also be briefed to ensure that they are
not pressured into any unannounced meeting with visiting VAT or
other direct tax inspectors.

2. HMRC reorganisation
======================
Although HMRC reorganisation is likely to be of more interest
to larger firms of accountants, it is worth mentioning what has
occurred. Except for the Anti-Avoidance Group, which is part of
Corporate Functions, national and local compliance are part of
the Operations Division of HMRC.

Operations and Tax Law Enforcement cover detection,
intelligence (including NCIS liaison) and exchanges of
information. This also incorporates Special Civil
Investigations (replacing SCO), which deals with Code of
Practice COP 8 investigations and investigations under the New
COP 9. Investigations under this heading include complex
avoidance, marketed schemes and Special Projects. The Large
Business Service also comes under Operations.

Also under the same department are Criminal Investigations,
which deal with the shadow economy, money laundering and
liaison with the serious organised Crime Agency (SOCA) and the
Revenue and Customs Prosecutions Office (RCPO).

Within SCI is the Offshore Fraud Project Group. Within the
Anti-Avoidance Group is AAG (Intelligence), AAG (Policy), AAG
(Investigations) and JITSIC (Joint International Tax Shelter
Information Centre).

Revenue and Customs Prosecution Office is a separate office
with a director appointed by the Attorney General. Its
functions are to carry on prosecutions initiated by HMRC, to
initiate prosecutions arising out of criminal investigations by
HMRC, and to provide legal advice relating to criminal
investigations or criminal proceedings. The Attorney General
may assign to RCPO cases to advise upon or prosecute. RCPO
prosecutors must follow the Code for Crown Prosecutions in
deciding whether to prosecute. However, there appears to be a
potential conflict as RCPO is not the exclusive prosecuting
authority in relation to tax offences, and HMRC retains the
power to institute its own proceedings.

Following the Serious Organised Crime and Police Act 2005, a
new agency will become operational on 6 April 2006. This is the
Serious Crime Agency (SOCA). SOCA brings together the National
Crime Squad, NCIS and the investigative and intelligence work
of HMRC relating to drugs and smuggling. SOCA is not just about
criminals, and one of its functions is interchange of
information with HMRC. There is no proportionality regarding
the information that it disclose.

Much of the above may seem academic to most of us, but it
illustrates that HMRC and the Government are getting highly
organised, and are serious about anti-avoidance, tax fraud and
the shadow economy. A recent tax case has underlined that
financial institutions may be compelled to reveal details of
interest received by customers on offshore accounts, so that
these developments should be taken very seriously. Combined
with the work of the existing Assets Recovery Agency, they
represent a very heavy and organised armoury in the hands of
government and HMRC.

Planning point

Practitioners should take note of the new HMRC organisation and
the new RCPO and SOCA agencies. Any clients who fail to declare
interest on offshore bank accounts are now likely to be exposed
sooner or later.

3. COP 9 and Hansard
====================
Practitioners have become used to the various versions of
'Hansard' over the years. Basically, this related to a
Parliamentary Statement to the effect that, if a taxpayer under
investigation was offered Hansard and co-operated during the
investigation and 'came clean', then no criminal prosecution
was likely to follow.

Well, Hansard is now 'dead'. Following the cases of R v W
[1998] STC 550, R v Gill [2003] BTC 404 and human rights
legislation, Hansard was abolished by the publication of the
revised Code of Practice COP 9, effective from 1 September
2005.

In tax investigations involving serious fraud, and where
investigators from Special Civil Investigations (SCI) deem it
appropriate, cases will be conducted under Civil Investigation
of Fraud procedure (CIFP). Meetings will no longer be conducted
under PACE 1984 (which in many respects has been replaced by
SOCPA 2005) and tape recorders used previously will now be
'mothballed'.

Where SCI decide to adopt CIFP in any given case, they will not
seek to prosecute the fraud that was the subject of the
investigation. This is subject to the proviso that prosecution
may still be considered if there is a materially false
disclosure during the investigation, which could be the
furnishing of a document known to be incorrect during or at the
end of the investigation. It should also be noted that the
level of penalties will be significantly higher in the case of
non-co-operation.

The CIFP procedure will only be used by SCI investigators, and
much of the previous COP 9 procedure remains the same.

The future of Code of Practice COP 8 cases is more uncertain.
It seems that future cases will be devoted to schemes (perhaps
marketed) and projects. 'Stand alone' cases may be dealt with
by Complex Personal Return (CPR) teams.

Planning point

Accountants should be aware of the demise of Hansard and the
issue of revised Code of Practice COP 9.

4. Money laundering
===================
Another piece of legislation that has revolutionised tax
investigations is money laundering. The Money Laundering
Regulations 2003 and Proceeds of Crime Act 2002 affect every
professional firm, and accountants to a great degree.

I do not propose to consider this subject in detail, but it
impinges on every case where the accountant knows or has
suspicion that the client may have committed a money laundering
offence. In such case, the appropriate report has to be made to
NCIS before any work can commence on the tax investigation.
Expert advice is available on this site regarding this subject
from David Winch.

Where a client undergoes a self-assessment random or full
enquiry, the issue of money laundering is less likely to arise,
as no money laundering offence may have been committed, and any
'innocent' defaults may well have not come within the money
laundering sphere. However, it remains a large extra
administrative burden for practising accountants, who, inter
alia, will have to appoint a Money Laundering Reporting
Officer.

Planning point

Accountants need to be au fait with the practical effects of
the money laundering law and regulations. A Money Laundering
Officer must be appointed. Small firms may need to appoint an
outside money laundering consultant.

5. Current investigation issues
===============================
Most of us have as our main investigation concern self
assessment enquiries, whether they be random or not, and
whether they are 'aspect' of 'full' enquiries.

Certain issues keep re-occurring as problems, and it is worth
highlighting some of them as follows:

(a) Private bank accounts

Many clients have received requests for private bank records
routinely as part of the opening letter of a self-assessment
enquiry. This matter is dealt with in HMRC Enquiry Manual, and
the consensus of opinion seems to be that such records need
only be produced if they have some bearing on the accounts,
assuming this is an enquiry into the business records.

One does not want to antagonise the inspector, but a polite
question as to the reason for the request is not out of order.
The practitioner should ensure that the terms of the HMRC
Enquiry Manual at EM 2220 and 2221 are adhered to.

In the case of a company enquiry it is quite out of order for
the inspector to make a request for any private records at all,
unless he has instituted a section 9A enquiry into the affairs
of the director concerned.

Planning point

Unless there is a direct link with the business accounts, it is
not unreasonable to query a request from HMRC for the
production of private bank statements and other private
records. Practitioners should ensure that HMRC staff comply
with their own manual.

(b) Meetings

The inspector will always demand a meeting, usually at the
outset of an enquiry. He has no legal right to force the
taxpayer to attend, but a complete rebuff might be regarded as
lack of co-operation.

One solution is for the accountant to ask that he and the
inspector have an initial meeting where the accountant is able
to provide general details of the business and records. It may
be that the remainder of the enquiry can be dealt with by
correspondence.

If it is necessary for the client to attend a subsequent
meeting, three issues are vitally important. The first is the
venue. The HMRC offices are too intimidating. The client's
business premises are not a wise choice, although the client
may feel more at home there. One does not want the inspector
'snooping around'. The best neutral choice is the office of the
accountant.

Second, it is important to ascertain who will be representing
HMRC at any proposed meeting. How many tax officers will be
present? Are they all forming the same TDO? What are their
roles within that office? Is a representative of HMRC
Accountants Department, the VAT department or the District
Compliance Inspector likely to be present?

The other issue is the agenda for the meeting. One has to
recognise that the inspector is well trained in meetings
procedure, and will use his or her training to intimidate the
client. HMRC do not like this, but a request for a detailed
agenda is not unreasonable.

If the inspector defers, there is no harm in the client saying
'I will have to look that point up and let you know later' if
unscripted questions are asked. Although one should not coach
the client beforehand, he or she should be warned that 'off the
cuff' answers or observations at the meeting could be extremely
dangerous.

The other issue about meetings concerns the request by the
inspector for the client to sign a record of the meeting. This
should never be agreed to. The accountant (or an accompanying
secretary) should make notes as the meeting progresses and
subsequently compare his notes with those of the inspector,
pointing out any variances. This is obviously time consuming,
but much damage can be done if this aspect is not handled
properly.

Finally the inspector may ask for a final meeting, known as a
'settlement' meeting where the level of penalties is agreed.
This meeting is not really necessary these days, but if the
accountant agrees to it, he or she alone should be present, not
the client.

Meetings need to be taken seriously by the accountant. Prior
preparation, liaison with the client and assessment of the
sequel of any meeting are necessary.

Planning point

Accountants need to take investigation meetings very seriously.
Prior preparation and post analysis at the sequel of the
meeting are very important. It should be ascertained beforehand
which HMRC personnel will be present. The venue of any meeting
is important. A prior agenda should be agreed wherever
possible. Post meeting notes prepared by HMRC should never be
signed. The practitioner or a member of his staff should make
their own notes.

(c) Working papers

The accountant's working papers are his or her own property and
should never be handed over in total to the HMRC, except where
a legal direction has been made under section 20, TMA 1970. The
terms of HMRC Statement of Practice SP5/90 apply.

Having said that, there are many cases where the books of the
client are incomplete to one extent or another. In such cases
it is sensible to provide the inspector with copies of cash and
bank reconciliations, journal entries and the extended trial
balance, so that the inspector can understand the books of
account in relation to the accounts already submitted.

It is better to either rewrite pages of the working papers, or
photocopy part of pages, where a page contains other
information that does not concern the investigation and/or year
of enquiry.

Planning point

Accountants should take care when HMRC request working papers
or any extract from them. The working papers should never be
produced in entirety, but copies of parts may be supplied in
order to enable the inspector to reconcile the books of account
with the submitted accounts.

(d) Failure to close

Practitioners report that, in some instances, inspectors
prolong an investigation or enquiry unnecessarily, particularly
where they have failed to 'break the records'. In such cases
and where it is in the client's interests, the practitioner
should consider early application to the Appeal Commissioners
for the investigation to be closed under the provisions of
section 28A, TMA 1970. This facility should not be used
routinely in all cases.

Planning point

The facility to apply to the Appeal Commissioners for closure
of an Enquiry under section 28A, TMA 1970 should be used where
necessary, but not routinely in all cases.

(e) Mandates

SCI inspectors have always used bank and other mandates in
order to obtain information about the taxpayer under enquiry.
It is understood that this practice has been adopted in some
local office enquiries. It should be recognised that a mandate
enables the inspector to obtain more information than even
under a section 20 notice. The greatest care should be taken in
advising clients to sign such mandates, particularly where they
are 'open-ended'. It is probably better for the accountant to
obtain copies of information, when required.

Planning point

The practice of HMRC staff asking taxpayers to sign bank and
other mandates appears to have spread to local enquiries.
Extreme caution should be exercised in allowing a client to
sign such a mandate.

(f) Production of documents

In the opening letter of a self-assessment enquiry the
inspector will ask for the production of books, accounts and
other documents in connection with the business period under
enquiry.

Notice that the taxpayer is required to produce the items
required - not send them to the tax office. Some commentators
suggest that they should be produced at the office of the
accountant, and then photocopies made of the items that the
inspector wants to take away.

There is no doubt that, if the inspector retains all the books
of a business at his office for several months, this can cause
substantial disruption to any business, quite apart from the
legal position.

Planning point

Where the books of a business are requested to be produced in a
self-assessment enquiry, find out from the client whether the
absence of the books will produce any significant disruption to
the business. If so, try and agree some compromise method of
complying with the law, such as producing books, accounts and
documents at your office.

(g) Section 19A notices

In a self-assessment enquiry, the inspector may issue a notice
under section 19A, TMA 1970 at the time of initiating the
enquiry, or very soon afterwards. This notice applies to
information in the specific tax return under enquiry, it must
be 'reasonably required' and the information must be in the
possession or power of the taxpayer.

It should be recognised that a section 19A notice can be
appealed to the Commissioners. The notice is suspended until
the appeal has been heard, but the Commissioners' decision on
the notice is final.

Some commentators suggest that the appeal process is used too
rarely by accountants, and the (perhaps premature) issue of
section 19A notices should often be challenged. The issue is
whether such a notice should be issued so early in an Enquiry,
and whether it is 'reasonably required'.

Planning point

Accountants should be aware that a section 19A notice issued to
a client can be appealed, and should undertake such an appeal
where the notice has been issued unfairly or prematurely.

6. IDEA
=======
IDEA is a new piece of software that has been made available to
inspectors of taxes. It is understood that this is a piece of
data investigation software that searches records for key words
such as 'entertaining', 'advertising' and 'hospitality'.

IDEA is the main tool of HMRC for examining computer records.

7. Enabling Letters
===================
'Enabling Letters' from HMRC have been around for a few years
now. Initially they related to very small accounts only. In
2004-2005 they were extended to businesses with larger
turnovers. Another addition has been enabling letters sent to
taxpayers who receive income from offshore.

In a way these letters are a possible warning of a future
investigation or enquiry. Unfortunately many taxpayers regard
them as intimidation, and will blame the accountant for their
issue.

It is suggested that all clients are reassured that the issue
of enabling letters is part of the administration of HMRC, but
nevertheless any such letters should be sent on to the
accountant.

Planning point

Clients should be reassured about Enabling Letters, but
nevertheless asked to forward them to their accountant.

8. Settlement
=============
Most investigations and enquiries end with a contract
settlement containing tax, interest and penalties. It will be
one of final jobs of the professional adviser to negotiate with
the inspector about the level of penalties.

Starting with a figure of 100%, percentage mitigation is given
for disclosure, co-operation and seriousness (which is divided
into size and gravity). This subject has been covered in
earlier Newthwires in detail.

However, where the inspector suggests a total percentage
penalty, he or she should be asked to divide the mitigation
into the various components. It is just possible that this
request could lead to further mitigation.

Planning point

Where HMRC suggest a total mitigation of a tax penalty in an
investigation, they should be asked to divide the mitigation
into the various components. This may just be the basis for
further mitigation.

9. Professional expenses insurance
==================================
The accountant's costs of dealing with a tax investigation are
heavy, and even in the smallest cases are likely to be more
than a thousand pounds. As far as the client is concerned, this
adds insult to injury, and sometimes the fee has to be written
off or reduced, or is paid very late. A sensible solution for
all concerned is professional expenses insurance, and this will
be the subject of a forthcoming Newthwire.

Planning point

Professional expenses insurance ensures that the reasonable
professional costs of dealing with a tax investigation will be
recovered.

10. Conclusion - Prevention
===========================
A tax investigation or Enquiry is an extremely stressful event
for the taxpayer, and perhaps also the accountant, and
inevitably disrupts the business. There is no means of
preventing a random enquiry under the self-assessment
legislation or the actions of a taxpayer who deliberately
falsifies books or extracts cash from the business (both of
which are tax frauds), but accountants may be able to stress to
clients certain steps that they can take to minimise other
types of investigation. Some of these that affect both parties
are;

# Taking into account the 'Ten Top Tips to get your Return
right' that HMRC issued on 10 January 2006.

# Observing time limits for the filing of returns and paying
tax due.

# Making sure that new sources of income are declared within
the appropriate time limit.

# Making sure that unusual items are explained in the 'White
Space' of the annual tax return. This is mainly the
responsibility of the accountant once he or she knows the
details. This includes unusually low drawings, variances in
gross profit %s and unexplained introduction of capital. Also
high business expenses for the type of trade and large
variances annually in the level of income and expenses.

# Educating clients to keep good records, so that they do not
offend against section 12B, TMA 1970.

# Ensuring that clients tell you the whole truth about their
business and personal affairs.

# Ensuring that there is good communication between you and
your client.

# Getting to know the client well. Are their savings growing
inexplicably? Is their lifestyle consistent with their tax
returns?

# In the case of larger businesses, are internal controls
adequate?

Some of this is 'pie in the sky', but prevention is far better
than cure, particularly with tax investigations.

Planning point

Stress to clients that prevention is better than cure, and
acquaint them with a list of obligations that may prevent any
investigation, other than a random one.

Tags:

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.