News
0000-00-00
A New Approach To Compliance Checks
Since the merger of the old Inland Revenue with Customs & Excise to form the new HMRC, there have been a series of changes aimed at bringing rules and procedures into line for both Direct and Indirect tax (i.e. IT, CGT,CT, VAT and PAYE).
The latest of these is a new approach to Compliance Checks and these changes will affect Tax Enquiry work as they give Inspectors enhanced powers to obtain information.
Background
Following a period of consultation, HMRC announced in the Budget of March 2008 that legislation will be introduced in Finance Bill 2008 to enable these changes to take place. The changes relate to: -
· record keeping requirements,
· powers to inspect/obtain information and
· time limits for making assessments and claims.
Implementation
The new information powers (and associated penalty provisions for non-compliance) came into effect from 1st April 2009, whilst the time limits for making assessments will take effect a year later.
Some specific issues that arise are: -
Time Limits
The time limit for an Inspector to make a ‘Discovery’ will be reduced to 4 years.
However, this good news may not be all that it seems……. In their Budget Notes HMRC point out that the basic existing time limits are 6 years when an understatement of liability arises from a ‘Mistake’ and 21 years for other understatements.
In practice, most settlements are currently restricted to the 6-year time limit, with only the more serious cases having settlements covering in excess of 6 years.
The new rules introduce the 4-year time limit mentioned above where a ‘Discovery’ is made, but there is also a 6-year time limit where there is “Failure to take reasonable care”, and a 20-year time limit where there is a “Deliberate understatement”.
As the vast majority of Tax Enquiry cases (that result in some additional liability) involve an error that HMRC could perceive to be due to the taxpayer not taking reasonable care, its likely that time limits for most cases will remain much the same as they are at present and we are therefore only likely to see time limits restricted to the 4-year period in those cases where there has been a genuine error.
Business Premises Visits
The new powers will give HMRC a right to visit business premises and to inspect records, assets and premises. This effectively brings Direct taxes in line with existing VAT powers.
Although HMRC have stated that their aim is still to ask for relevant information, the Inspector only has to show that the information is “reasonably required” in order to have grounds for an inspection to be carried out.
Many Inspectors already need little encouragement to go digging into a businesses affairs, so only time will tell if individual Inspectors use this new power as it was intended by HMRC or as the ‘green light’ to crawl all over a taxpayers business.
Information Powers
The new information powers will enable an Inspector to formally request that the taxpayer provides information or a document that is “reasonably required for the purposes of checking the tax position”.
Inspectors often use similar phrases during the course of a Tax Enquiry when trying to justify a request for information they have no right to see (especially private bank statements).
So it will be no great surprise if some Inspectors start to use this new power as a way of trying to get their hands on all sorts of information.
Summary
Potentially, the new legislation is going to give greatly increased powers to Inspectors to obtain information and inspect records.
However, HMRC have indicated that their intention is only to use these formal powers to enable them to obtain information that is required for the purposes of checking the tax position.
If individual Inspectors start using these powers as a matter of routine, to effectively obtain any information they like, their attempts should be resisted.