Mark McLaughlin

A new approach

The ‘headline grabbing’ proposed changes to the tax system (e.g. new ‘income shifting’ anti-avoidance rules, the capital gains tax changes, including the single 18 per cent rate and the abolition of taper relief and indexation relief (see below), and the residence and domicile tax changes) have overshadowed other significant developments in the tax world. For example, HMRC issued a consultation document ‘A New Approach to Compliance Checks: Draft Legislation and Commentary’ earlier this year. The present round of consultations ended on 6 March, and the changes could be introduced from as early as April next year.

Record keeping

The Government proposes to amend the existing record keeping requirements for income tax, capital gains tax, corporation tax and VAT. Interestingly, the proposed changes include new powers to make regulations to shorten the period for which records must be retained for tax purposes. However, new regulations may also specify which records must be retained, set conditions for keeping ‘information’ rather than records, and specify if original records must be kept. The new powers also enable HMRC to deal with record keeping matters on a less formal basis (e.g. by a notice), which would carry the force of law. Penalty provisions will continue to apply for record keeping failures, but it is proposed that such penalties should be capable of being suspended.

Information powers

The most significant proposals relate to HMRC’s information powers. The existing information powers for income tax and capital gains tax purposes in TMA 1970, s 19A (‘Power to call for documents for purposes of certain enquiries’) and s 20 (‘Power to call for documents of taxpayer and others’), together with existing equivalent provisions for corporation tax and VAT, would be replaced by new legislation. It is also proposed that the new powers will support PAYE visits and NIC inspections.

HMRC state in the consultation document that: “In most cases HMRC will continue to ask for information without issuing a formal notice.” They go on to say: “In most cases a power will only be formally exercised when information is not provided voluntarily or it is known in advance that it is unlikely to be provided voluntarily.”

The draft legislation allows an HMRC officer to issue a notice for the taxpayer to supply information and/or documents if “reasonably required” for “checking the taxpayer’s tax position”, within a time period “reasonably specified in the notice”. Of course, what is “reasonable” is generally a matter of personal opinion and judgement, which will probably be tested in litigation. There are also proposed powers to obtain information and documents from third parties. Those powers extend beyond the existing ones in TMA 1970, s 20(3), which only relate to documents. The expression “checking” in this context includes any HMRC enquiry or investigation, and “tax position” includes tax, penalties, claims and elections.

Taxpayer notices

Where the taxpayer has submitted a tax return for income tax and capital gains tax purposes, HMRC may only issue an information notice broadly if one of the following conditions is satisfied:

* An enquiry by HMRC is in progress into the return (or claim, election etc); or
* HMRC suspect that the return, etc is incorrect, resulting in the need to make a tax adjustment; or
* The information or documents specified in the notice are needed to investigate the taxpayer’s VAT position (nb it is proposed that this condition will be extended to PAYE as well).

Corresponding provisions also relate to corporation tax notices. The draft legislation provides for rights of appeal against taxpayer (or third party) notices. The appeal must be lodged within 30 days of the notice, and is made to a ‘First-tier tribunal’ (as opposed to the Commissioners under the existing appeal system).

New powers of inspection

The proposals of major interest, and possibly concern, for many practitioners will probably be HMRC’s powers to inspect businesses. These are new powers for direct tax purposes, although not for VAT. A “business” for these purposes includes property lettings and charity activities.

Business assets

The proposed rules allow HMRC to issue a notice requiring the taxpayer (or a third party) to make “business assets” (i.e. tangible assets, but excluding documents, land and buildings) available for inspection, if that inspection is “reasonably required” (there’s that word “reasonably” again - Ed) to check the taxpayer’s tax position.

Business premises

Perhaps of greater concern to taxpayers and their advisers is HMRC’s proposed new power to inspect business premises, including statutory business records (i.e. records which are required to be kept for direct tax or VAT purposes) found on the premises, if the inspection is “reasonably required” to check a person’s tax position. In addition, one of the above conditions must be satisfied as mentioned above in relation to taxpayer notices. HMRC state: “This power may, exceptionally, be exercised without notice although visits will normally be arranged in advance” (emphasis added). HMRC must normally give the occupier at least 24 hours’ notice of the inspection. However, a visit can take place with less than 24 hours’ notice, or even without notice, if the inspection is approved by an “authorised officer” (not defined) and a written notice is served. In either case, an HMRC officer can take copies or make extracts from inspected documents, and there are also powers allowing for the removal and retention of documents for a “reasonable period”.

HMRC cannot use the power to force entry into a business premises. However, the interesting, and rather worrying, aspect of this proposed power is that there are no grounds for objection or appeal against an inspection notice. The taxpayer could refuse entry, but HMRC could then consider imposing a penalty for non-compliance. This may then involve the taxpayer in the time and potential expense of making an appeal.

Penalties

The proposals include a penalty regime for failing to comply with information and inspection notices. A fixed initial penalty would be imposed. The amount is not yet known, but a figure of £300 is under consideration. Daily penalties could also be imposed in cases of continued default. Once again, the amount is not decided, but HMRC propose a maximum penalty of £60 per day. However, no penalty would arise if there is a “reasonable excuse” for the default, and the draft provisions provide for a right of appeal to a Tribunal against a penalty imposed by HMRC. However, there is also a new power for HMRC to apply to the Upper Tribunal for an additional, tax-related penalty in “exceptional” cases, i.e. broadly where HMRC have reason to believe that continued failure or obstruction is resulting in the taxpayer paying significantly less tax than would otherwise be the case.

Safeguards

It is hoped that the proposed powers, if enacted, will be properly and fairly administered by HMRC at all levels. Practitioners whose clients have previously been the subject of HMRC enquiry will have their own experiences of dealing with HMRC officers. My own experience has been that some officers are easier to deal with than others. No doubt HMRC could say the same about dealings with practitioners. However, the key difference is that HMRC officers may soon have considerable, extended powers at their disposal. Practitioners can only hope that such powers are used consistently and sensibly.

Article Added Saturday, 08 March 2008 | 3610 Hits

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