Inspection Powers

Finance Act 2008, Sch. 36 contains inspection powers that enable HMRC to inspect business premises, business assets and statutory records.  Such inspections form an important part of carrying out compliance checks.

The powers must be used reasonably and proportionately and can only be used to inspect business premises.  They cannot be used to inspect premises that are used wholly for residential purposes.  It will be noted that the premises must be used wholly for residential purposes to be exempt form the powers.  If they are used only partly for business purposes then they are subject to HMRC’s inspection powers.

There are safeguards built into the legislation intended to ensure that the use of the powers is reasonable and proportionate.  HMRC have also put procedures in place to ensure that staff are aware of the limitations on the use of these powers and of the need not to breach a taxpayer’s right to privacy under the Human Rights Act 1998.

The provisions of Finance Act 2008, Sch. 36 will be covered in more detail in the Legal Background division when that division has been amended for the new provisions.

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Types of Visit

Announced visits will usually be by prior arrangements, following an informal request asking for information and an inspection of the business records and premises.  If the taxpayer refuses an informal request for a visit, the officer can arrange a visit by issuing a formal notice.

If the nature of the risk requires it HMRC may carry out an unannounced visit, without giving any notice of the intended visit.  No unannounced visit should be carried out unless it has been approved by an Authorised Officer.

If the officer believes that their inspection may be obstructed they can, with the approval of an Authorised Officer, apply to the Tribunal for their approval to a visit.  If this is given, the taxpayer can be penalised for obstructing the officer carrying out the inspection.

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The Visit

At the start of the visit the officer will give the taxpayer a copy of the Fact Sheet on visits and explain what will happen during the visit.  They may indicate that they would like to discuss the records with the person who keeps them.  They can only do this with the agreement of the taxpayer.

The taxpayer has the right to refuse to allow the officer to enter the premises.  However, unless the taxpayer agrees to a visit at a later date, the officer will consider asking the Tribunal for approval for the inspection.  If the Tribunal has approved the inspection, the taxpayer can be penalised for obstructing the visit unless there is a reasonable excuse such as illness or unavoidable delay.  The penalty for obstructing an inspection that has been approved by the Tribunal is £300 plus a daily penalty of up to £60.

In the course of a visit the officer has a right to inspect the premises, the business assets and the statutory records that are on the premises at the time of the visit.  To see any records other than the statutory records the officer needs the taxpayer’s agreement.  Otherwise, they must have been requested by a taxpayer notice requiring them to be produced at the time of the visit.

There are some documents that the officer cannot request in a taxpayer notice.  If such documents are included amongst those provided at the inspection, whether deliberately or accidentally, the officer must draw the taxpayer’s attention to the fact that they have no right to inspect them without the taxpayer’s consent.

Inspecting things means nothing more than looking at them.  It does not include opening boxes and searching in them.  Nor does it include walking unaccompanied around the premises, which requires the taxpayer’s agreement.  The officer should not mark the records that are inspected in any way, even to indicate that they have been checked.  Goods or assets can, however, be marked to show that they have been inspected, although the officer must not damage them when do so.

The officer can record the information obtained in the course of the inspection and can take copies of the documents inspected or make extracts from them, if necessary by removing them from the premises.  If a written receipt for any documents removed is not offered, the taxpayer can request one.

Documents removed by an officer should not be retained longer than necessary.  If any are lost or damaged the taxpayer is entitled to compensation.

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Unannounced Visits

Unannounced visits will be used to tackle the black economy and where serious fraud is suspected.  HMRC will consider making an unannounced visit where:-

  • Business taxpayers have repeatedly missed appointments OR
  • Deliberate understatement will only be evidenced if the visit is unannounced, for example:-
  • Failure to register for VAT
  • Failing to operate PAYE on illicit, cash workers
  • Suppressing cash takings, e.g. by operating a second till
  • Trading in a second, off-book activity
  • Missing trader VAT and Labour Provider fraud cases
  • There is a risk that the business may have been established to facilitate fraudulent tax repayments.

An Authorised Officer must approve an unannounced visit and they should only give their approval if it is the only way of establishing the correct tax position.  Otherwise, HMRC’s actions would not have been reasonable and proportionate.

Unannounced visits are frequently made by Missing Trader, Hidden Economy and Labour Provider teams.  Where it is anticipated that the inspection will be obstructed, HMRC will seek approval for the visit from the Tribunal so that the taxpayer can be penalised for any obstruction.

As with announced visits, unannounced visits must be made at a reasonable time and the occupier of the premises must be given written notice of the inspection, together with the Fact Sheet on unannounced visits.  The officer will then explain the reason for the visit and how they intend to carry it out.

If the taxpayer is present the officer must advise them of their right to ask their agent to be present but need not delay the start of the inspection to await their arrival.

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Visits Arranged or With Notice

When an announced visit is arranged, either by agreement or by way of a formal notice, the taxpayer will be notified of the date and time of the visit, the name of the visiting officer and the records that are to be inspected.  They will also be sent the Fact Sheet on visits explaining their rights and responsibilities.

As the only documents that can be inspected using the inspection powers in Finance Act 2008, Sch. 36 are those that are held on the business premises, the officer may issue a notice requiring that the necessary documents are produced at the premises at the time of the visit.  It is likely that if the visit is arranged by way of a formal notice rather than by agreement the officer will also issue a notice requiring that the records should be produced at the business premises.

Although a visit arranged by agreement might, with the taxpayer’s agreement, be made with less than seven days’ notice, if it has not been possible to reach agreement on the time of the visit, the officer must give at least seven days’ notice.

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Visits Authorised by Tribunal

With the approval of an Authorised Officer, the officer can apply to the Tribunal for their approval of a visit to the business premises.  Approval will be sought from the Tribunal if entry to the business premises has been, or is expected to be, refused.

The object of seeking the Tribunal’s approval is to deter non-compliance.  A penalty can be imposed on a taxpayer who obstructs a visit that has been approved by the Tribunal.

At the same time as seeking the Tribunal’s approval for the inspection visit, the officer will also seek approval for a taxpayer notice to make the records available at the premises if they are required there for inspection.  By obtaining the Tribunal’s approval, the officer ensures that no appeal can be made against any of the requirements in the notice.

If the officer is given the Tribunals’ approval for an inspection visit, the terms of the approval must be observed.  If the approval was for an announced visit, the officer cannot instead decide to make an unannounced visit.

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When Visits will be Made

The inspection powers in Finance Act 2008, Sch. 36 only permit visits to business premises.  Visits cannot be made to premises used wholly for residential purposes.

As in the past, compliance checks for PAYE/NICs and VAT will normally be carried out by visiting the business premises.

In the case of most small and medium-sized businesses (SMEs), HMRC expect that compliance checks will be carried out most frequently by asking for documents and information to be sent to an HMRC office.  They would normally expect compliance checks to be made by way of a visit to the business premises only if it is convenient for the officer and the taxpayer to see the business records at the business premises, or if it is necessary to:-

  • Inspect the business assets, for example to check the stock held
  • Detect people operating in the black economy
  • Collect evidence of suspected deliberate understatements; or
  • To carry out credibility checks

HMRC’s Risk and Intelligence teams select taxpayers who are to be visited by Local Compliance officers. Large Business Service (LBS) have always carried out visits to the large business they deal with and they will continue to make their own selections.

Before carrying out a visit to business premises as part of a compliance check, the risk should have been identified and a note made of why it is best addressed by way of a visit instead of calling for documents and information.  The timing of the visit should be reasonable and the officer must be able to show that the compliance check is reasonable and proportionate so that the conditions of Art. 8(2) of the European Convention o Human Rights (ECHR) are satisfied.

If the taxpayer has a good reason why the officer should not visit their business premises, this should be made known to the officer.  This might be due to lack of space, disruption caused to the operation of the business or the adverse effect on customers.  The officer can then arrange to see the business records at an HMRC office or the premises of the practitioner if they accept that there is good reason not to visit the business premises.

Officers are reminded that:-

‘Managers are ultimately responsible for ensuring that visits are reasonably required and proportionate to the risk and that inspection powers are used in a way that minimises disruption and interference with taxpayers’ right to privacy.’

The taxpayer will always be handed a Fact Sheet on visits explaining their rights and responsibilities.

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Private Residences Checks

The powers contained in Finance Act 2008, Sch. 36 can only be used to carry out inspection visits to business premises.  HMRC do not have the power to inspect premises that are used wholly as a private residence unless invited to do so by the taxpayer.  If the premises are used partly for business and partly as a private residence, HMRC can inspect the parts used for the business.

Finance Act 2008, Sch. 36 permits HMRC to enter premises which:

‘in relation to a person, premises (or any part of premises) that an officer of Revenue and Customs has reason to believe are (or is) used in connection with the carrying on of a business by or on behalf of the person.’

It is the view of HMRC that a private residence may come within this definition if:-

  • The business is run from the home
  • Business assets are stored at the home
  • Business records are kept at the home
  • A home is registered as the principal place of business of VAT

They do accept, however, that where a person stores records at home because there is nowhere else to keep them, but has no goods or other business activity at the home, then the premises cannot be inspected at the home unless the taxpayer invites the officer to do so.

HMRC have indicated that they would consider it reasonable to conduct an inspection at a person’s home in the following situations:-

  • Where stock is kept at home
  • In the case of an outworker the stock or assets kept at their home may be inspected – the taxpayer should be given an opportunity to make the items available for inspection elsewhere if this is practical
  • At a farm the office, fields barns and areas involved in business activity can be visited but the private areas of the farm house and private garden cannot be visited without invitation
  • In the pub the cellar, bar , commercial kitchen, store rooms and any vacant rooms which are let can be visited but the private living accommodation cannot be visited without invitation
  • Where a shop ha a flat above, the commercial premises, including offices and store rooms, can be visited but any separate premises used solely as a private dwelling, for example a flat above the shop premises, cannot be visited without invitation
  • In guest houses and hotels the bedrooms, areas available for guest use, kitchens used to prepare guest meals, store rooms and offices can be visited but any private areas of the guest house, staff bedrooms and occupied guest bedrooms cannot be visited without invitation
  • At a surgery the offices and waiting rooms can be visited as well as any consulting rooms not in use
  • Where it is appropriate to physically check that the proportion of household expenses claimed as a tax deduction is reasonable
  • Where there is evidence that a home is used for a business and that business has not been declared to HMRC
  • Where there is evidence that the business connected with the premises is being misrepresented to HMRC, for example:-
  • If a trader has no discrete business premises and reports a large turnover and claims substantial VAT repayments, HMRC need to verify the volume of trade passing through the address to check that the repayments are valid
  • If a trader has a large turnover in high value commodities but no discrete premises and no stock
  • If a mobile telephone number offering services, such as betting tips/personal services/horoscopes, is registered to a private home, HMRC need to call to establish the nature of business being operated from that address

HMRC recognise that they cannot visit homes used in connection with a business in the following circumstances:-

  • A director or employee is working from home
  • A director or employee has temporarily taken some records home from other business premises to work on
  • Premise are rented to another person and used solely by them as their home

Where one of the partners in a partnership works partly at home, HMRC would consider that the home would be a business premise of the partnership and might be inspected to check the proportion of expenses claimed as a business expense.

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Time to Comply

An information notice must state the time by which the information required is to be provided. The statutory provisions do not say what is a reasonable time to allow but it is normally taken by HMRC to be 30 days. They will specify a date 40 days from the date of issue to allow for delivery, weekend and holidays.

Longer period than 30 days can be specified in the notice, particularly if there is a large amount of information to be provided. The taxpayer should contact the officer immediately it becomes clear that more time is needed. If the officer considers that the request for more time is reasonable they will agree it.

Before turning down a request for more time, the officer will take account of the fact that not being given a reasonable time to comply with a notice is grounds for appeal against it.