New Tax Regime for HMRC Enquiries
Posted: Oct 31 in , , by kevin kinsella
The new Tax Regime for HMRC Enquiries is beginning to take shape.
The new regime is significantly different and the effect of the changes to the legal basis for making enquiries will mean that :-
1. HMRC will be able to start an enquiry at any time;
2. Private records can be requested at the outset and ;
3. The final settlement figure will be imposed rather than negotiated.
ENQUIRIES CAN BE STARTED AT ANY TIME.
Under the old regime HMRC could start an enquiry only if :-
1. The enquiry window was still open
Or
2. They made a discovery
Their information powers under TMA 1970 Section 19A were tied to an enquiry into a return under S9A (with equal provision for partnerships and companies).
Once the enquiry window of enquiring into the return was closed the position was final unless HMRC made a discovery.
Their new information powers are not tied to an enquiry into a return and can be exercised at anytime either before or after a return has been made. If the information they obtain indicates that tax has been underpaid they will be able to open an enquiry if the window is still open or make a discovery if it has closed. The effect is that they will be able to start an enquiry at anytime by exercising their information powers.
PRIVATE RECORDS
Before the new information powers were enacted, private records could only be requested after HMRC had shown the tax return was incorrect.
Now they can ask for any information they consider necessary to check the tax payers tax position (not tax return).
FINAL SETTLEMENT
The old regime allowed for a contract settlement when the amount of the penalty was a subject for negotiation between the practitioner and the inspector.
This was not to the liking of HMRC because they felt that some practitioners were better at negotiating than their inspectors with the result that the level of penalties was inconsistent – that is, lower than they would have hoped for in some cases.
In their Code of Practice they now make it clear that at the close of an enquiry they will assess the additional tax and tell you what the penalty is and how it has been calculated.
It was suggested that HMRC had tried to be prescriptive as to the type of behaviour that fell into various categories for the purpose of calculating the penalty.
This suggestion was borne out by an HMRC Speaker at a Seminar to educate Accountants on the new penalty regime who said that from now on arriving at the penalty would be a simple matter of box checking.
SELECTION BY RISK ASSESSMENT
To identify the areas where tax may possibly have been lost HMRC will always carry out a risk assessment before starting a check or an enquiry. This will be the case even when a case is selected for a random check or enquiry.
Because an enquiry under the old regime had to be linked to a tax return or some specific information which led to the inspector making a discovery that a particular individual’s tax affairs were not in order risk assessment was carried out by reference to the particular circumstances of the individual tax payer.
Now the new information powers can be used at anytime, and merely to “check a tax payers tax position”, a person may find themselves subject to an enquiry simply because they belong to a particular tax payer population or sector which has been identified by the HMRC as likely to have compliance issues. They say that, where possible, they will seek to work with representative bodies or trade organisations to address the risk so that the clients or members of those bodies or organisations will have the opportunity to correct matters without a compliance check.
HMRC envisage different approaches depending on whether the risk is as a result of
(a) the taxpayer’s uncertainty about their obligations or not knowing how to comply;
(b) carelessness or a determination not to comply.
In the first case their aim will be to raise awareness and educate by :-
© media campaigns highlighting areas that they are looking at;
(d) working with trade and professional bodies to raise awareness of tax issues to highlight common areas of error and to explain what in their view needs to be done to take reasonable care;
(e) working with agents and intermediaries to identify the less compliant and to understand agent processes that reduce the risk of error ;
and
(f) sharing risk profiles with agents.
In the case of those who are persistently careless or deliberately non-compliant the risk will be individually identified and checked using behaviour types and the
tax at risk to decide what action to take. This could be :-
1. where there appears to be a mistake and the amount of tax is relatively small a telephone call to correct the position;
2. where a taxpayer appears not to understand what needs to be done a visit to establish the areas of error and to explain how to avoid the same problems in the future;
3. where a taxpayer has failed to take reasonable care or appears to have deliberately understated their tax liability a full enquiry along the usual lines;
and
4. where the taxpayer is believed to be concealing the number of employees a visit without prior arrangement.
PRE RETURN OR POST RETURN CHECK
Having identified a risk the inspector will then decide whether the most appropriate action would be a pre-return or post-return check.
Sub-power is non-business taxpayers power. It is envisaged that pre-return checks are most likely for non-business taxpayers …. Power
1. who have not sent in a return for whom HMRC holds information that indicates they have not made a return of income of gains that should have been declared or
2. having been identified as having possible IT, CGT or CT issues all those are capped issues arising out of a VAT, P.A.Y.E. or a NIC check.
BUSINESS OF TAXPAYERS
The most likely occasion of when it will be considered appropriate to carry out a pre-return check on business taxpayers are when :-
1. they have failed to register with HMRC and notified their liability to tax;
2. HMRC have reason to suppose that the records being retained might not be adequate or not adequately maintained or
3. a visit to the business premises will enable HMRC to judge whether the business activities are more extensive than they have been led to believe.
Random pre-return checks would also be made to test the efficiency of HMRC risk assessment procedures.
In other circumstances it is likely that the most appropriate action would be a post-return check.
STARTING A CHECK
HMRC will take different actions depending on the nature of the risk that they have identified but they expect the processes for starting and carrying out a check to be similar whether it is a pre-return or a post-return check.
No matter how informal the approach to the taxpayer to carry out a check whether by telephone or letter the taxpayer will have to be made aware that the check has started and that HMRC has the powers to proceed formally to obtain the information they require if it is not provided voluntarily. It will also be made clear to them that they are required to do so, their rights of appeal and the limitation to HMRC’s powers.
While this can be dealt with by enclosing with a letter to the taxpayer a copy of the new Codes of Practice that are being developed for the new checking/enquiry procedures, it is not yet clear how this will be got across to the taxpayer when an approach is made by telephone.
HMRC suggest that taxpayers could be provided with more information about checks on their website, in a telephone message or by a leaflet, depending on the taxpayers preference but it would appear that those who are asked to provide information by telephone will only find out what they should have known before being asked for information after they have provided it.
Indeed it appears from what HMRC have said that they would not consider it necessary to explain the legal position for the check if the taxpayer simply provided the information when asked for it. They say that an Officer might ask to see copies of records and information in the opening contract and might just ask for an explanation. If this were provided voluntarily the information powers would not be used formally. Only if the items were not provided would formal notices be issued in writing setting out the taxpayers obligation and the consequences of failing to provide the items.
PER-RETURN CHECKS
Pre-return checks will be made on both business and non-business taxpayers. Where as it is more likely in the case of a business taxpayer, an agent is acting, the first point of contact will be the agent. HMRC have pointed out that visits will be arranged by non-specialist staff so if the taxpayer or agent needed to discuss the matter before the visit they would have to make it clear so that they would be put in touch with the visiting officer.
When HMRC notifies the taxpayer and agent that a check is being started, the risk area will be outlined to identify the records that need to be seen. It will be explained whether the risk relates to a specific area (for example where the records exist to ensure expenditure is correctly categorised as revenue or capital) or to the business activity generally. A copy of the Code of Practice for business taxpayers will be provided.
As well as arranging a convenient time for a visit or making the information available, the officer will also make arrangements to see the business assets or premises if considered necessary. If the taxpayer refuses to provide the records or any information requested by the officer, or refuses access to the business premises, formal notices under the new information powers will be used.
A pre-return check will only be limited to pre-return issues where the business is new and no return has been submitted. In the cases of a continuing business a pre-return check will not be restricted to periods for which no return has been submitted. If a weakness is identified in the current records, HMRC will want to consider whether this risk existed in the records on which earlier returns were based.
Because the time limit for starting an enquiry into a return that has been submitted (the enquiry window) will continue to apply. HMRC will have to show that they have made a discovery before they can carry out a check on that return. This should not, however, pose much of a problem. Unless, exceptionally, the taxpayer can show why the weakness was limited to the current year, and would not have existed in an earlier year, HMRC can always show that they have reason to suspect that new information would show that the earlier returns were incorrect.
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