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James Bailey points out how HM Revenue & Customs (HMRC) will make life tougher for deliberate defaulters, for Tax Insider.

Introduction - Finance Act 2008

Since the 2008 Finance Act extended HMRC’s powers to gather information and visit businesses, they have been looking for a chance to flex their newly-acquired muscles. They now have the right to demand information from third parties about your financial and business affairs, and to pay unannounced visits to your business premises to inspect your records. So look out...!

Of course, when these new powers were given to them, HMRC were very reassuring about only using them in exceptional cases, and there has been a certain nervousness about how and when these powers should be used.

Managing Deliberate Defaulters

HMRC have now developed a ‘programme’ which they call ‘Managing Deliberate Defaulters’ in order to provide a context in which they can be seen to be using their intrusive new powers for the greater good.

A ‘Deliberate Defaulter’ is an individual or a business which has ‘deliberately’ understated their tax liability. This should be contrasted with those who are merely ‘careless’ about their records or their returns.

For example, if you don’t keep proper records of your sales and your accountant has to reconstruct them from your other business records, you are likely to be regarded as ’careless‘. If you intentionally do not record a sale (for example, a garage mechanic employed during the day who does ‘moonlight’ jobs on friends’ cars at weekends) then you are likely to be regarded as a ‘Deliberate Defaulter’.

What Deliberate Defaulters should Expect

HMRC have set out what they intend to do to ‘Deliberate Defaulters’, and it sounds like no fun at all for the Deliberate Defaulter.

Depending on how deliberate the default was, the Deliberate Defaulters will be placed in this new programme for between two and five years.  During this period, they can expect:

• Unannounced visits to their business premises to check the records they are keeping;
• Demands for additional information to be submitted along with their tax returns, such as full accounts, bank statements, invoices, and so on;
• ‘In depth’ checks of all aspects of their tax compliance – so someone who deliberately defaults by exaggerating their business expenses can expect enquiries into their operation of PAYE, VAT, and so on;
• To be spied on – HMRC refer to this as ‘observing and recording the defaulter’s business activities’ and ‘making test purchases’ then checking them against the records.

If any of these checks turn up further deliberate defaults, there will be a real risk of criminal prosecution.

No One is Safe!

I am sure that none of the readers of TaxationWeb are deliberate defaulters, but that doesn’t mean you will not find your business in the Deliberate Defaulters' programme.

If a Deliberate Defaulter has a controlling interest in a business, then that business may also be placed in the new programme, so if you are a junior partner or a minority shareholder in a business, and your senior partner or your managing director plays fast and loose with his expenses, or fails to mention that account he has in Jersey, you may find that the business you depend on for your livelihood will become the subject of intrusive and expensive demands for what we might call ‘super compliance’ – keeping perfect records and being required to offer the taxman a cup of coffee while he inspects them at unpredictable intervals.

Practical Tip

I suppose it will become another question of ‘due diligence’ when considering the purchase of a business – “Is the company or are any of its directors in the Deliberate Defaulters' programme?”

It will also be important, in borderline cases, to fight tooth and nail to pay penalties on the basis of ‘carelessness’ rather than ‘deliberate default’!

About The Author

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