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Busy Practitioner by Mark McLaughlin CTA (Fellow) ATT TEP

Mark McLaughlin CTA (Fellow) ATT TEP considers some issues for tax practitioners to consider when dealing with HMRC self-assessment enquiries for individualsFollowing the recent submission of 2005 self assessment returns for most individual clients, HMRC will commence issuing enquiry notices under TMA 1970, s 9A. Tax return enquiries are obviously not welcomed by clients or practitioners, and can involve a considerable amount of time and work. Some important practical issues regarding enquiry work are outlined below.

Professional fees and insurance

HMRC enquiries put mental and physical stress on clients (and perhaps practitioners!) whether or not there is something to worry about. An enquiry may also put the client/adviser relationship under stress. Fees for dealing with an enquiry can be substantial, possibly leading to resistance from clients. Accountancy fees in respect of ongoing compliance work (e.g. preparing accounts and assisting with the self-assessment of tax liabilities) are generally allowable deductions against trading income (see Statement of Practice 16/91). However, where additional fees are incurred in dealing with an enquiry by HMRC into a self-assessment return, those fees will only be allowable if the enquiry results in no additions to profits, or if an adjustment relates to the year of enquiry only and does not arise as a result of fraudulent or negligent conduct (Revenue Interpretation 192).

Many insurance companies offer fee protection insurance to cover against the cost of professional fees in enquiry work. The precise nature of fee protection insurance varies, with some policies insuring the client and others insuring the firm itself. Best practice is for the firm to make fee protection insurance available to their clients. Client premiums for fee protection insurance against the costs of possible future tax enquiries are only allowable if the additional fee costs would have been allowable. Therefore premiums for fee protection policies entitling the policyholder to claim for the cost of accountancy fees in negotiating additional tax liabilities resulting from fraudulent or negligent conduct are not allowed as deductions against trading income (Revenue Interpretation 256).

Enquiry notices

The firm should check that the HMRC enquiry notice is valid and has been issued within the relevant time limit. The time limits within which a Revenue officer must give the taxpayer notice of his intention to make an enquiry into the self assessment return are as follows (TMA 1970, ss 9A, 12AC):

• If the return was delivered by the filing date – up to twelve months after the filing date;

• If the return was delivered late – up to and including the quarter day following the first anniversary of the day the return was delivered; and

• If the return has been amended by the taxpayer – up to and including the quarter day following the first anniversary of the day the amendment was made.

The ‘quarter days’ are 31 January, 30 April, 31 July and 31 October.

Opening letters

HMRC’s opening letter in an enquiry will invariably request information within a certain timeframe (e.g. 30 days). There is no statutory basis for a time limit imposed by the Revenue officer in the enquiry notice. Penalties cannot be imposed for failing to comply. However, HMRC may regard any delay as a lack of cooperation, which could be a factor when determining the level of penalties at the end of the enquiry if the return is found to be fraudulently or negligently incorrect. The opening letter will not state whether the enquiry has been selected or is at random, but it should indicate whether it is a full enquiry, or is only into aspects of the return. As mentioned, HMRC staff are encouraged to agree a time limit for a response (normally 30 days as a minimum), although there is scope for flexibility, if appropriate (see EM 1580).

Meetings

The general approach of HMRC is to seek a meeting with the client in the early stages of the enquiry, such as following an initial review of business records. Meetings are not mandatory, except in suspected serious fraud cases. However, clients should not be encouraged to think that the enquiry can be handled without any personal involvement, as this may be both counter-productive and potentially inefficient. Whilst HMRC cannot normally insist on a meeting, the taxpayer’s willingness to attend meetings is a factor that will be taken into account if fraud or negligence is established when determining penalties and their mitigation due to cooperation (see IR160 ‘Enquiries Under Self Assessment’). Practitioners should therefore carefully consider whether agreeing to a meeting with the Revenue is in the client’s best interests, and whether the meeting will bring the enquiry to an earlier conclusion.

Non-business bank details

Non-business bank details should not be requested by HMRC in every case or as a matter of process. However, Revenue enquiry staff will seek this information if they consider it reasonable to do so. The decision as to what is ‘reasonable’ may ultimately rest with the Commissioners based on the individual facts of the taxpayer’s case, if agreement cannot be reached. The HMRC Enquiry Manual states (at paragraph 2221):

‘Non-business bank details should not be requested in the opening letter as a matter of course. However, where bank accounts are not based on a robust and effectively operated record keeping system which is supported by adequate and appropriate safeguards and/or include unvouched or unverified items, it would be reasonable to request the private bank details with the other records.’

The guidance offers assurance that properly recorded business drawings banked in a non-business account is insufficient reason of itself for details of that account to be requested.

Information notices

HMRC have the statutory right to call for such documents and information as may reasonably be required for the purposes of an enquiry (TMA 1970, s 19A). The Revenue officer conducting the enquiry must issue a written notice requiring the information etc and those documents must be submitted within the time limit specified in the notice, which must be at least 30 days from the date of the notice. Penalties may be incurred for failing to provide the information specified in the notice (TMA 1970, s 97AA). The taxpayer may appeal against the notice if he considers that the requirement is unreasonable. The time limit for an appeal is 30 days from the date of issue of the notice.

It should be noted that a notice can only require the production of information in the taxpayer’s possession or power, and which is reasonably required for the purpose of the enquiry into the tax return. The taxpayer will not normally have the power to obtain documents belonging to third parties. In addition, the requirement in a section 19A notice to ‘produce’ information does not necessarily mean that it must be sent directly to HMRC. In some cases, it may be more appropriate to make the information available for inspection by HMRC at the firm’s offices or the client’s premises.

January 2006

Mark McLaughlin


Mark McLaughlin CTA (Fellow) ATT TEP is Editor of Taxation