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HMRC investigation specialist Chris Chadburn offers his view of the tax enquiry landscape.

Introduction

In common with hundred of others I followed with interest the tale of Nick Morgan’s battle with HMRC during the spring of 2008. [ See Nick Morgan's article Everything You Wanted to Know About a Tax Investigation - Should I Go to a Meeting? - Ed. ] The unique aspect of the story for me was Nick’s total openness and willingness to share his experiences with the public, warts and all. A few weeks later and just like Nick I was getting frustrated. This stuff isn’t rocket science.  It sounds like he’s had a raw deal so why can’t some knight ride over the hill and help him sort it out?  Nick eventually posts a request for professional help with a checklist of 7 specific needs.  On the basis that I ticked 6 of the boxes (I’ve never had ambitions to be a Rotarian) my fate was sealed and I began trawling through the 1000+ folios of the 3 year-old investigation file with a few thousand pounds' tax at stake. 5 months later and it's settled. In common with the vast majority of these cases I found that with a clear view of respective strengths a conclusion that all sides can live with can be negotiated. The imminent prospect of a contentious appeal hearing does focus minds.

I am now delighted to share some thoughts to supplement the extracts from Nick’s Tax Investigation for Dummies.

How did this start?

Selection

Targeting the right taxpayers to check is obviously key to tackling non-compliance and the Revenue had been steadily increasing their focus on determining tax risks in the years since I was a district inspector in the 1980s. The responsibility for selection of cases shifted from the investigators to Risk Intelligence and Analysis Teams in 2001. 

Investigation work was being centralised into large Area Offices at this time and each RIAT would typically comprise several dozen individuals whose primary job was to collate information and determine which cases should be taken up. The RIATs report direct to Head Office and the NAO welcomed the changes that were designed to ensure centralised decision-making was embraced at local level. This followed several years of dwindling investigation yields.

The key point for advisors and taxpayers is that invariably compliance checks will only be undertaken when it is considered tax is at risk. HMRC now use this term “compliance checks” for the whole range of interventions from a phone call to the little old lady about a minor query on her return to concerted checks across all taxes for a major plc.  There are random selections but it is never appropriate to consider these checks to be routine unless it is obvious that the issues being raised are minor. The number of random checks is very small. For example, annual samples for self-employed returns are stated to be 3,000 and 250 for small companies.

Meetings

Nick went to a meeting with the taxman at an early stage. It was made clear during the discussion what the perceived risks in his return were and these were addressed.  It is common practice in Local Compliance return enquiries for HMRC to give no reasons for the selection and to request a meeting after the business records review without giving a meaningful agenda. The reality is that their agenda will centre on the perceived risks and I am always very wary of advising a client to attend a meeting unless we have a pretty good idea what the issues are. There is no obligation to attend a meeting and the pros and cons need to be thought through.

Evidently this cat and mouse approach was becoming a problem too for HMRC, for in late 2007 a new approach, “Openness and Early Dialogue”, was trialled for 5 months. 

This involved HMRC:

• explaining why the enquiry was opened
• agreeing a time scale for a meeting, the production of information, records examination and a discussion of findings
• focusing on key risks and detailing requirements to address these.

The trial ended well over a year ago but HMRC’s feedback on the results and the way forward has been anything but “Open and Early”. I would have thought that if there were going to be changes then it would have been to everyone’s advantage to introduce these from 1 April alongside the changes in information powers, penalties, tribunals, reviews etc.

On querying the position with HMRC the response was that the initial trials had gone well but now there were further trials to ensure any changes would improve the approach to VAT compliance as well as direct taxes.

The new way for all or the few?

The approach to risk at the Large Business Service end is for HMRC to work very closely with each taxpayer. In their summary sheet “Working with Large Business” they say they will discuss:

 “how we assess and manage the risks that apply…we will publish guidance on risk assessment to help you understand what we see as the key risks…our efforts to protect tax revenues will be focused primarily on those customers that present the greatest risks.”

The idea is that low-risk taxpayers will be subject to relatively light touch scrutiny with disproportionate resource allocated to high-risk businesses. This approach has now been rolled out to larger (turnover of £200m or more) and higher-risk businesses dealt with by Local Compliance. Smaller companies, but still large per the EU definition, will see their risk assessments and may take part in the preparation and review of these. The changes give an opportunity for specified businesses to proactively work together with HMRC in understanding and addressing their perceived risks. 

So, clearly HMRC believe that the LBS approach works for sizeable taxpayers and the 2007/8 trial indicates that a significant element of this strategy - openness - works much lower down the scale.  Is the officer opening the enquiry into the return of the £250k turnover plumbing business in Walthamstow next week going to continue the approach that has been used since the start of SA? That is a neutral or negative response to the question “what’s the problem here?” until the enquiry is well down the road. I believe the HMRC approach now being used for larger Local Compliance cases puts the advisor in a far better position to establish at an early stage in any enquiry what the perceived problems are as a condition of providing full and proactive co-operation. That’s certainly the line I will be taking.