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What's happening with the single compliance process?

18th Jun 2013
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Before self assessment was introduced in 1996/7 the inspector had to justify the opening of an investigation. Under SA the taxman was under no obligation to do so and typically did not. That position has been under review as part of the new single compliance process, but HMRC has gone very quiet on that topic, reports Chris Chadburn.

Interviewing the taxpayer at an early stage of an investigation has always been a critical objective for the inspector. In the absence of candid explanations of the reasons for the investigation or detailed agendas, advisers tended to:

  • provide what was the legally required – usually records and some basic 
  • get written questions from the inspector after the record review
  • consider the pros and cons of an early meeting after considering the answers to those questions.

Timeline

Oct 2007 An “openness & early dialogue” pilot approach to formal enquiries is launched, in which HMRC will say whether it's a full or aspect enquiry and explain why the enquiry has been opened.

Early dialogue – agreement to an explicit timescale for:

· initial meeting or phone call

· production of information and documents

· records examination

· discussion of findings

Aug 2009 FOI request – what’s happening to OED, trial scheduled to end April 2008?

· evaluation of trials completed end of August 2009

· OED adopted in the Personal Tax Compliance Customer Group and expected to be adopted in other areas of work in the short-medium term

Oct 2009 Learning Together session.  Reference to OED by HMRC director

Mar 2010 'Tax Adviser' article by New Ways of Working programme director, who anticipated that “in 2010/11 many areas of our work involving compliance checks will move to an OED approach”

Jun 2011 HMRC provide a seven-page briefing paper for tax agents on the single compliance process for SMEs “building on the principles of openness and early dialogue ...” The timetable envisaged more trials and implementation in May 2012

Feb 2012 Short HMRC update. Trial extended to August 2012 and implementation envisaged by September 2012

Oct 2012 HMRC briefing paper (pretty much as earlier version). Trial phase extended again

Mar 2013 FOI request – what’s happening?

· trial phase ended 31/3/13

· seek to share sufficient detail of the perceived risks at all levels so the customer can understand the risk

· COP9 outside SCP

In late 2007 HMRC announced trials of a new approach of “openness and early dialogue” (OED) to “improve the way we deal with our formal enquiries. This more collaborative approach had already been successfully used with the large business sector and by mid-2009 it was being rolled out to the larger (turnover £200m or more) and higher risk businesses being dealt with by local compliance.

The essence of SCP is:

  • Four Levels of checking from one – no meeting dealt with by correspondence or on the phone to four where an “evasion approach is required
  • Estimated average times to work the case varies from 1.5 days (Level 1) up to eight days (Level 4)
  • Process:
  1. OED – only addressing the identified risks
  2. Collaboration with agent
  3. Swift on site records review – sampling as necessary
  4. Commercial approach

Issues

By this stage it was clear that although OED was being used across several significant areas of HMRC, but most small business investigations still kicked off with the inspectors playing their cards very close to their chest. When were my typical clients going to get a fair crack of the whip?

In October 2009 I attended an HMRC “learning together” session on the new powers and penalties. I wrote an article for Taxation on this and this included the following:

“(Mark Leech HMRC director) also confirmed that the sharing of identified risks at an early stage was a road that HMRC was in the process of going down. He believed this was the best way to significantly raise the cost effectiveness of inspections and this was in everyone’s interest. Having said that HMRC was not obliged to share information with the taxpayer in any particular situation”

This did not fill me with any confidence that small business taxpayers were going to get the same deal as larger firms any time soon. Most of my work is from accountants and typically I get involved several weeks or months after the start of an investigation. Although it would seem that there has been some shift towards more openness the process is clearly not yet at the end of the road and will not be until it is formalised.

I have discussed this with a number of HMRC investigators over the years. They suggested that the troops on the ground were very wary of the openness approach in OED/SCP, in particular with the more serious cases.

In my second FOI request I asked:

  1. when the trial phase would end (the last update had been in September 2012); and for
  2. confirmation that it was envisaged that taxpayers and agents would be informed of the perceived risks at all levels of SCP
  3. clarification of what HMRC meant by local compliance fraud work (excepted from SCP).

The purpose of the second and third questions was to establish whether there was any obvious dilution of the openness being touted by HMRC in previous years.

Answer two was that they would “seek to share sufficient detail of the perceived risks at all levels so that the customer can understand the risk”. There is then a standard response that they may be unable (or unwilling?) to provide certain information and the example consistently cited is information provided by a third party. 

A follow-up question brought further details “all level 4 cases in the SCP will generally involve the sharing of some information on the perceived risks… the amount of detail shared will be different for each case …” (third party information again cited).

Answer three simply says that serious fraud work under Code of Practice 9 is outside the scope of the SCP. 

The June 2011 SCP brief refers to the exception for COP9 civil investigation of fraud work . The October 2012 version of the brief refers to a key exception for local compliance fraud work. Is that the same thing? It might well be, but it could also mean “any case where it is believed that there has been deliberate understatements of tax”. That is a very different thing.

The end of the road?

HMRC stated in response to my latest FOI request that “there will be an update on the SCP following the conclusion of the trial shortly”. The trial ended on 31 March 2013. 

It would be useful to see more examples in that update of situations where HMRC will not provide details of the perceived significant risks at the outset. Let’s have some openness.  After a wait approaching six years a lack of clarity on this key point would add insult to injury.

Venntax’s Chris Chadburn has specialised for more than 30 years in tax investigation work and on the commercial side of the fence has focused on SMEs and cases involving serious fraud.

Replies (4)

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By The Black Knight
24th Jun 2013 12:23

Still operating as seperate units

HMC&E and HMIT are still operating as separate units..they might share the same building, BUT if you get done for the Vat you get away with the Income tax or vice se versa.

Making Tax evasion profitable even if you are caught! ?

That has been the impression of investigations I have seen and the reading of tribunal cases which leave you screaming "what about the VAT?"

Really is quite sad.

Thanks (1)
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By steve2646
26th Jun 2013 00:44

Risks are probably crap

Unless things hve changed significantly since I left HMRC in 2010 their risk analysis teams are well to be frank crap.  Most inspectors were and probably still are too embarrased to reveal the identified risks as they know that they could quickly be explained away without them getting any money.  They therefore go on a fishing trip and fall back on their old favourites which will inevitably include a very thorough cash flow and bank analysis.

There is also now in SME enquiries a greater reliance on information received from the public.  And the inspector would again be too embarrased to explain that he has been told he must open the enquiry because a neighbout is jealous of your new car and expensive holidays. 

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Replying to Paul Hawes:
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By chrischadburn
26th Jun 2013 12:12

So no credible risks put on the table ...

... minimize co-operation.  

Openness and Early Dialogue through SCP is HMRC's policy and it is only the precise details of how it will be implemented for SME's that is an issue.  It is up to the investigators to explain why they are not being open and if you are not satisfied with their answers take it further.  

Ultimately you may decide to give them what you have to in terms of records but continue to press for reasons for the enquiry after any records review.  Certainly don't agree to a meeting unless you know what to expect.  Get questions in writing and give answers to relevant questions in the same manner.

At some point they will have to put their position on the table.   The sooner the better for all concerned.

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By steve2646
26th Jun 2013 13:52

Use a meeting to best advantage

I certainly don't agree with the questions in writing suggestion.  This is only likely to prolong the investigation and increase costs.  It is best to have a meeting but advise the inspector at the start that your client will only answer questions directly related to his business and his return.  If he asks, as he will, questions relating to spouses income, private expenditure, the weather etc, make him explain the reason and dont answer unless a question is justified.  Don't under any circumstances get involved in what would appear to be innocent chat, this is not a social event.

At the end of the meeting it is important to ask what concerns he had and if he has any concerns which have not been answered and to ensure his reply is minuted.  Dont allow him to get away with comments like he will now consider what has been discussed.  This is your opportunity to pin him down to precisely what concerns remain and you should make sure you use it.  If there are no remaining concerns then you should make it clear that you expect the enquiry to be closed and get him to minute the reasons if he will not do this.

 

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