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Mark McLaughlin CTA (Fellow) ATT TEP comments on the the new powers shortly to be made available to HMRC following Finance Act 2008.

Checking 'tax positions'

Despite many taxpayers (and some agents!) considering that HMRC already have enough powers, new powers were introduced in Finance Act 2008, which are scheduled to take effect from 1 April 2009 (FA 2008, Sch 36).

The new powers allow HMRC officers to issue notices to provide information or produce documents “for the purpose of checking the taxpayer’s tax position”. This includes the introduction of rules allowing HMRC officers to inspect business premises. (See below)

A ‘check’ for these purposes could be anything from a short telephone call to a detailed investigation into a person’s financial affairs over a number of years. ‘Tax position’ includes past, present and future liabilities.

End of the enquiry window?

These new rules mean that HMRC’s information powers are no longer related to enquiry notices. In some cases, HMRC officers will be able to inspect records before the relevant tax return is filed. Some tax commentators have observed that this change signals the end of the tax return enquiry ‘window’ as we know it.

Taxpayer notices can also be issued if a tax return (i.e., personal or company) has already been made, if a self-assessment enquiry is in progress in respect of that return, or if an HMRC officer has reason to suspect a loss of tax, or if it relates to VAT or PAYE.

Information notices do not require privileged information to be provided to HMRC. However, legal and professional privilege does not apply to auditors and tax advisers. The new powers do provide some protection (as does the current legislation), but it is broadly limited to information related to audits, or to tax advice, and to documents created and belonging to them. There are exceptions to this protection, including explanatory information provided to the client by his accountant in relation to a document already supplied to HMRC. 

Information and inspection notices

It is important to appreciate that information and inspection powers can only be used in certain circumstances. Normally, the individual’s or company’s self-assessment return (or claim) will be under enquiry for the relevant period.

However, there are exceptions to this general rule, such as where a person is not required to submit a tax return, or for VAT or PAYE purposes (i.e., where there is no enquiry process). In addition, HMRC can give information notices if they discover or have reason to suspect that tax has not been assessed, or that tax has been understated, or that excessive tax relief has been given.

HMRC’s powers extend to copying or removing documents. Whilst there is a right of appeal against information notices, this right does not extend to information or documents forming part of the taxpayer’s ‘statutory records’, or to an information notice issued by the First-tier Tribunal.

Inspecting business premises

Perhaps the most controversial feature of the new powers is that an HMRC officer can enter a business premises and inspect the premises, business assets and documents, if the inspection is reasonably required to check a person’s tax position. However, this power does not allow HMRC to force entry, or to conduct a search. Nor can HMRC inspect any part of a premises used solely as a dwelling.   

HMRC will normally try to agree a time for the inspection, or otherwise give at least 7 days’ notice of a premises visit, which must be at a ‘reasonable time’. However, inspections may be unannounced in certain cases (i.e. if made by an authorised officer, or with the approval of an authorised officer or the new First-tier Tribunal’).

There is no right of appeal against an inspection. However, there is an appeal procedure in respect of a failure to comply. Penalties can only be imposed if the inspection has been authorised by the First-tier Tribunal. The standard penalty for obstructing an HMRC officer in an inspection, or for failing to comply with an information notice, is £300. Thereafter a possible maximum penalty of £60 may be imposed for each day that the obstruction or failure continues. There is a general right of appeal against both penalties. Tax-related penalties can also apply in some cases.     

Limitations of powers

Whilst HMRC’s information powers may seem ominous, there are certain limitations. For example:

• Clients may refuse an HMRC officer entry to their business premises (although if the inspection has been approved by the First-tier Tribunal, a penalty can be imposed);
• HMRC officers are not entitled to force entry to a business premises, or search the premises.

HMRC’s information and inspection powers are intended to be used on the basis of risk. However, it will be interesting to see the extent to which ‘tax positions’ are checked at random, and whether the taxpayer will be informed if the check is random or not. 

Protecting clients

Some comments in the tax press suggest that concerns about HMRC’s new powers have been largely exaggerated by many practitioners. However, the changes cannot be ignored or underestimated. Steps that advisers should consider to protect their clients include:

• Making full and proper disclosures in tax returns;
• ‘Training’ clients to keep and maintain good records;
• Knowing and understanding the law relating to HMRC’s powers, and particularly their limitations;
• Instructing clients to communicate any direct contact made by HMRC; and
• Ensuring that transactions are implemented properly, and that supporting documentation is complete and correct. 

The above article is reproduced from 'Practice Update' (November/December 2008), a tax Newsletter produced by Mark McLaughlin Associates. To download current and past copies, visit: http://www.markmclaughlin.co.uk/index.php/archives/category/about/newsletters)